That’s a common question many parents ask. The cost of higher education has risen over the years. Today, many families need some type of financial aid to help cover tuition, room, and board.
To prepare for these future costs, some parents use 529 savings plans. A 529 plan can be set up while your child is still young to help cover qualified education expenses later. But does a 529 plan count against financial aid? Here is what to know.
What Is a 529 Plan?
A 529 plan is a college savings account designed to help cover qualified education expenses. You can open a 529 plan for your child or for others, including grandchildren, nieces, nephews, or even family friends. There is no limit to how many accounts you can open, although contribution limits may apply.
Each state runs its own plans, so it helps to review your state’s rules and guidelines.
One reason people often consider 529 savings plans is the potential for tax-deferred growth. If the funds are used for qualified education expenses, withdrawals are not subject to federal or state income taxes. These expenses may include:
- Tuition and fees
- Books and required supplies
- Computers and related technology, including internet access, software, and printers
- Room and board for students enrolled at least half-time
- Special needs services for students with disabilities
- K–12 tuition expenses, up to a set annual limit
- Student loan repayments, up to a lifetime limit per beneficiary and sibling
Withdrawals used for non-qualified expenses may face a 10% penalty, along with income taxes on earnings. Under IRS rules, up to $10,000 per year can also be used for K–12 tuition at public, private, or religious schools.1
Understanding Financial Aid
Students who need help paying for school can apply for federal aid using the Free Application for Federal Student Aid, or FAFSA.2 After you submit the FAFSA, your information is used to calculate your expected family contribution, or EFC. This estimate shows how much your household may be able to contribute toward college costs.
Based on this information, you may receive a financial aid package. This package can include loans, grants, work-study programs, or other types of assistance.
Several factors affect how aid is calculated. These include income, benefits, and assets owned by both the student and their parents. In some cases, home value may also be considered.
For many families, the aid they receive does not fully cover college costs. As a result, they may need other ways to cover the remaining balance. A 529 plan can help fill part of that gap.
Does a 529 Plan Count Against Financial Aid?
A 529 plan is considered an asset. This means the amount saved in the account is included when calculating your expected family contribution. It may affect how much aid you receive.3 Any increase in your EFC may be offset by the funds saved in your 529 plan.
Who Owns the Plan?
Student
If the student owns the plan, a larger portion of the account value is included in financial aid calculations compared to a parent-owned account. Students are generally expected to contribute more of their assets toward education costs.
Family Member or Friend
If the account is owned by someone outside the immediate household, such as a relative or friend, it is not counted as an asset on the FAFSA.
Grandparents
Under the FAFSA Simplification Act, distributions from grandparent-owned 529 plans are not treated as student income. This means they do not affect eligibility for federal need-based aid. However, some colleges that use the CSS Profile may still consider these distributions.
How to Start Saving for College
While a 529 plan can affect financial aid, the impact may be smaller than not saving at all. Starting early can help build funds over time. As your child gets closer to college, you may want to speak with a financial representative to review your options and next steps.
529 plans are subject to investment risk, including the potential loss of principal.
Sources
- Tax Benefits for Education. https://www.irs.gov/pub/irs-pdf/p970.pdf.
- Complete the FAFSA® Form. https://studentaid.gov/h/apply-for-aid/fafsa.
- An Introduction to 529 Plans - Investor Bulletin. https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/introduction-529-plans-investor-bulletin.
- Parents | Federal Student Aid - Financial Aid Toolkit. https://financialaidtoolkit.ed.gov/tk/outreach/target/parents.jsp.
