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. But whether this is true or not really depends on a couple of things, like who owns the plan, when withdrawals are taken 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 schools that offer federal need-based financial aid require students to complete the Free Application for Federal Student Aid (FAFSA). Schools will use information from the FAFSA to calculate a students Expected Family Contribution (EFC)

However, 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 schools that use the CSS Profile and their requirements can vary by school, let’s focus on how a 529 plan can affect 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 parental asset on the FAFSA. Around the first $20,000 will fall under the Asset Protection Allowance (the exact amount depends on the parents’ age). Any parental assets beyond that amount will reduce a student’s aid package by 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 $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. But 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 aid package by 20% of its 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. 


Any interest, dividends or capital gains generated from a student’s asset that are reported on their income tax return will be reported on the FAFSA. This untaxed income will be assessed at 50% when calculating EFC. Earnings in a student-owned 529 plan, however, do not have to be reported on the FAFSA and will have zero affect on financial aid.


529 plan distributions are another area where the effect on financial aid will depend on the account owner. With a parent- or student-owned plan, 529 withdrawals used to pay for college will not be reported on the FAFSA. That means if you liquidate your account to pay for your child’s sophomore year, there will be no effect on a subsequent year’s FAFSA.

But the situation gets a little stickier when the account is owned by a grandparent or other relative. The student will have nothing to report on the FAFSA while the money is sitting in a grandparent-owned 529 plan, but any withdrawals used to pay for their college will be counted as untaxed income on the FAFSA. Let’s say a grandmother wants to cover a full year of her grandson’s tuition at a private college, which costs $45,000. He’ll be a freshman in the fall, and he plans on applying for financial aid every year. On his first and second FAFSA, he’ll have nothing to report, but when he applies for federal aid for the third year in college (when he’s required to report prior-prior year income) his untaxed student income that was generated from Grandma’s gift may reduce his aid package by as much as $22,500 – Yikes! 

To prevent this from happening, Grandma can wait until January 1 of her grandson’s second semester of his sophomore year of college to pay his tuition, after he completed his last FAFSA. This of course, assumes he is graduating in four years. 

You could also transfer account ownership to the student’s parent, but then the funds would be counted as a parental asset and reduce the following year’s aid package by up to $2,538 ($45,000 x 5.64%). 

A third option is to rollover the money from the grandparent’s 529 to the parent’s 529, one year’s worth of funds at a time. If you wait until after the FAFSA is filed to transfer the funds from the grandparent 529 to the parent 529, it won’t be reported as an asset on the FAFSA. You just have to be sure to spend they money before the next year’s FAFSA comes around. Also, be sure to open the parent 529 account in the same state as the grandparent 529, as some 529 plans have recapture rules when you roll over the funds to a different state’s 529 plan.

RELATED: Estimate your financial aid eligibility here

ORIGINAL POST: 09/12/2016;  UPDATED: 03/14/18