Does a 529 Plan affect financial aid? Find out here: Via forbesadvisor
There are two types of 529 plans: prepaid tuition plans and education savings plans. All 50 states and the District of Columbia offer at least one type of 529 plan.With a prepaid tuition plan, you can purchase college units or credits at their current prices for future use.
Since tuition is steadily rising every year, buying credits while your child is young can significantly reduce your overall education costs. There are sometimes restrictions on what kinds of schools the beneficiary can attend, so read the plan documents carefully before contributing your money.An education savings plan is a tax-advantaged investment account that can be used to pay for qualifying education expenses at essentially any U.S. college or university. Just like your retirement account, however, these investments come with risk; the balance of these 529 plans can grow or shrink depending on the market.Many people delay saving money in a 529—or don’t use one at all—because they’re worried opening a 529 will hurt their child’s chances of qualifying for valuable financial aid, such as federal college aid or need-based grants. While investing in a 529 plan will generally affect the child’s eligibility for need-based aid, the overall impact is generally minimal. To determine how the 529 will impact the beneficiary’s financial aid status, consider who owns the 529 account and how the money is distributed.In this case, the 529 plan would fall under the parents’ assets on the—the form that determines the amount of federal aid the student qualifies for. A parent’s assets are calculated at the most favorable rate. Meaning, they are expected to contribute a smaller portion of their assets, and the child would be eligible for more financial aid.The 529 plan would be counted under the student’s assets. Students are expected to contribute a larger portion of their assets to their own education, and would thus be eligible for less financial aid.The 529 plan would not be counted as an asset. However, the student would need to report the 529 withdrawals as unearned income on the FAFSA, which is calculated at the least favorable rate. In this example, the student’s eligibility for financial aid would be negatively affected the most.While a 529 plan can reduce the amount of need-based financial aid your child can receive—such as grants, federal work-study programs or subsidized student loans—there are other ways to reduce your child’s education expenses and save money.When you fill out the FAFSA, the form will ask for information you reported on the tax return from two years prior. For example, the 2022-2023 FAFSA requires you to submit information from your 2020 tax return. If a grandparent or other relative has a 529 for your child, reserve the money in that fund for the child’s junior or senior year. With this approach, the withdrawals from that account won’t affect the child’s undergraduate financial aid eligibility.If you are thinking of opening a 529 plan, it’s wise to keep it in the name of the parent or child. It’s counted at a much lower rate than 529 plans owned by other family members, reducing the impact on the federal financial aid the student can qualify for.Although 529 plans can affect your child’s eligibility for need-based financial aid, they don’t affect your child’s eligibility for merit-based aid. If your child has good grades, excels at a sport or has some other skill, they canfederal or private student loans . Whenever possible, federal loans should be used first since they tend to have lower interest rates and more flexible repayment options. But private student loans can be useful tools to cover any funding gaps. If you decide to utilize private loans, compare offers from multipleWhile your child is in school, you may be able to claim someIf you’re worried about how a 529 will affect your child’s financial aid eligibility, know that 529 savings generally have only a small impact. Saving your money now can greatly reduce your child’s need for other financial aid, reducing how much money they need to borrow in student loans. If you need help evaluating your options, reducing the impact on need-based financial aid or paying for college,
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