Does a 529 Plan Affect Financial Aid?

With teens heading off to college, parents may wonder, does a 529 plan affect financial aid

Key Takeaways

  • 529 plans are state-sponsored savings accounts designed to help cover education expenses. Contributions can grow tax-deferred.
  • Withdrawals used for qualified education expenses are tax-free at the federal level. Non-qualified withdrawals face a 10% penalty plus taxes.
  • 529 plans owned by parents or students are considered assets when calculating financial aid eligibility. This can reduce aid somewhat.
  • Plans owned by grandparents or others don't need to be reported on financial aid forms. But withdrawals are considered student income.
  • Despite potential financial aid impacts, saving with a 529 plan can still be beneficial to cover gaps between aid and actual college costs. Consulting an advisor can help optimize your strategy.

That's a common question many parents may ask. It's no secret that the costs of higher education have risen dramatically over the years. Today, most families need some sort of financial aid to cover the costs of room, board and education.

To help save for these future costs, some parents turn to 529 savings plans. A 529 plan can be set up while your child is still young to help cover qualified educational expenses down the road. But does a 529 plan count against financial aid? Here's some information to consider.

What Is a 529 Plan?

"529 plan" is short for 529 college savings plan. These plans are designed as savings vehicles to help cover qualified educational expenses.

You can set up 529 plans for your kids and even children who aren't your own, including grandchildren, nieces, nephews and family friends. There's no limit on the number of plans you can set up, though maximum contributions can apply.

Since these plans are run by each state, it's a good idea to check your state's particular rules and regulations.

One reason people often consider 529 savings plans is because contributions have the potential for tax-deferred growth. If the money is spent on qualified education expenses, you do not have to pay state or federal income tax. These expenses can include:

  • Tuition
  • Books
  • Fees and supplies

Any withdrawals that are not spent on qualified expenses are subject to a 10% withdrawal penalty on top of any income tax you pay on the gains. Per IRS regulations, qualified distributions of up to $10,000 are also allowed for K-12 tuition for public, private and religious schools.1

Understanding Financial Aid

Some students who need financial aid to cover school costs apply for federal aid using the Free Application for Federal Student Aid (FAFSA).2 After you complete the FAFSA form, the information you provide is used to calculate your expected family contribution (EFC). This is what the federal government believes you can contribute to higher education costs. You will also be granted a financial aid package that could include loans, grants, work-study programs or other forms of aid.

There are many factors that go into the formula that the federal government uses to determine a student's financial aid package. Among the primary factors are the student's and the parent or parents' assets, which can include income, benefits and even home value.

For many families, their financial aid package can fall well short of the total cost of a college or university, and it becomes necessary to fill the gap. That's where a 529 college savings plan may help to make a difference.

Does a 529 Plan Count Against Financial Aid?

529 plans are considered assets, so the amount of money you've saved in your plan is considered when figuring out your EFC. It can have an impact on the amount of financial aid you receive.3 Any increases in your EFC could be covered by what you've saved in your 529 plan.

Who Owns the Plan?


If it's the student, then a larger percentage of the amount saved in the 529 is calculated into the formula compared with a parent-owned plan. In determining federal aid, the student is typically expected to contribute toward their own education, a higher percentage of their assets are typically used in the government's calculations.

Family Member or Friend

If owned by an outside friend or family member (other than a grandparent), then it is not counted in these financial aid considerations.


Things can get a bit more complex when it comes to 529 savings plans that are owned by grandparents. Many grandparents want to contribute to their grandchildren's education. Grandparent-owned 529 plans aren't listed on FAFSA forms, so they aren't included in financial aid calculations. When money is withdrawn from a grandparent-owned 529 plan, it's considered student income and must be reported on the FAFSA.

How to Start Saving for College

While 529 plans can affect financial aid, that impact may be smaller than the impact of not saving for college ahead of time. As your student approaches their college years, consider meeting with a registered representative for more information.

Save for the Future

Save for the Future

Start investing in your child's future today by enrolling in a 529 plan and securing their educational future.


  1. Tax Benefits for Education 2022.
  2. Complete the FAFSA® Form.
  3. Investor Alerts and Bulletins.

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