Does a 529 plan count against financial aid?

You may be worried that having a 529 will affect financial aid. While it’s true that 529 plans owned by a dependent student or one of their parents are counted as an asset on the FAFSA, the impact on student eligibility for financial aid is usually minimal. The extent of this impact depends on a range of factors, most notably who owns the 529 account.

Do 529 plans affect scholarships?

529 plans have zero impact on merit-based scholarships, including academic and sports scholarships. These scholarships are based on your merit and potential in a particular area, rather than your level of need, and so don’t take 529 accounts or other assets into account.

Does a 529 plan increase SAI

Another important aspect of the relationship between your 529 plan and FAFSA is your SAI, or Student Aid Index. The information you submit on your FAFSA is used to calculate your SAI, which is, roughly speaking, the amount of money your family is expected to contribute to your or your child’s education. Although you may end up paying significantly more (or less) than your SAI, this figure is used by colleges as a starting point to determine your financial aid eligibility. The SAI formula is based on a variety of factors, with income and assets being at the top of your list. Depending on who owns the 529 account, it may be counted as an asset on your FAFSA, and therefore could increase your SAI.

Does a 529 Plan Affect Financial Aid?

By Kathryn Flynn

August 10, 2023

If you’re considering using a 529 plan to save for future college costs, you may be worried about hurting your child’s eligibility for federal financial aid. If so, you’re not alone.

In fact, just under one-third of our College Savings Survey respondents believe that savings in a 529 plan are not considered when a college determines financial aid eligibility. However, the relationship between 529 plans and financial aid depends on a few things, like who owns the plan and what type of aid you’re applying for. In most cases, your 529 plan will have a minimal effect on the amount of aid you receive and will end up helping you more than hurting you. There are also several steps you can take to increase your child’s eligibility for student financial aid.

Types of aid

All colleges that offer federal need-based financial aid require students to complete the Free Application for Federal Student Aid (FAFSA). Colleges will use information from the FAFSA to calculate a student’s Student Aid Index (SAI), which is a measure of a family’s ability to pay for college.

In addition, there are less than 200 colleges that use an additional form to calculate institutional award eligibility, called the CSS Profile.

A family’s assets will be counted differently on each form. For example, assets in a grandparent-owned 529 plan are not reported on the FAFSA, but students may be asked to include them in the CSS Profile.

Since there are so few colleges that use the CSS Profile and their requirements can vary by college, let’s focus on how a 529 plan can affect how much money you can get from the FAFSA.

Account Ownership

The value of a 529 plan owned by a dependent student or one of their parents (529 plans do not allow joint ownership) is considered a parent asset on the FAFSA. About the first $10,000 will fall under the Asset Protection Allowance (the exact amount depends on the older parent’s age). Any parental assets beyond that amount will reduce a student’s aid package by up to a maximum of 5.64% of the asset’s value.

So, if a parent’s 529 account exceeds the Asset Protection Allowance by $10,000, his child’s financial aid award could be reduced by as much as $564. Of course, no one wants to lose $564, but the tax-free investment gains you’ve earned in your 529 account could likely outweigh this tiny loss. However, other student-owned assets are not treated as favorably. A custodial account under UGMA/UTMA, for example, will be counted as a student asset and will reduce the financial aid package by 20% of the asset value. So, in this case a $10,000 student asset means $2,000 less financial aid.

As mentioned above, assets in a 529 plan owned by a grandparent or other relative are not included on the FAFSA.

Earnings

Any interest, dividends or capital gains generated from a student’s asset that are reported on their federal income tax return will be counted on the FAFSA. This income will be assessed at 50% when calculating SAI.

Earnings in a 529 plan, however, do not have to be reported on the FAFSA and will have zero effect on financial aid.

Withdrawals

Qualified 529 plan withdrawals are not reportable as student income, regardless of who is the 529 plan account owner.

How Changes to the FAFSA Affect Grandparent-Owned 529 Plans

As previously noted, grandparent-owned 529 accounts are not reported on the FAFSA. In previous years, however, there was a disadvantage to grandparent-owned 529 plans in that distributions from these plans would count as untaxed income to the student on the next year’s FAFSA.

Starting with the 2024-25 school year, this is no longer the case. Distributions from grandparent 529 accounts – and from 529 accounts owned by any other relatives other than the parent filing the FAFSA – will no longer need to be reported on the FAFSA as untaxed income for the student. This is great news for grandparents looking to support their grandchildren’s studies, as their 529 withdrawals will no longer impact students’ eligibility for needs-based financial aid.

Read this post for a full explanation of changes being implemented as part of the new simplified FAFSA.

See also: