How scholarships, grants, and financial aid affect 529s

What happens to a 529 plan if my child receives a scholarship, grant or financial aid?” This is a question that many parents have when they’re planning for their child's education. In this article, we’ll go over what options you have if your 529 beneficiary receives financial assistance.

What else can 529 funds be used for, if not for a bachelor’s program?

Remember that you can make tax-free withdrawals as long as the funds are used for educational purposes. That includes many options beyond a bachelor’s program. Here’s a quick list.

• Master’s degrees
• Doctorate programs
• Law school
• Medical and dental school
• Community college
• Living expenses
• School supplies
• Study abroad programs
•  Another beneficiary

What study-abroad expenses qualify under a 529 plan?

Many young college students dream of living and learning in a foreign country. That said, because of the expense involved in studying abroad, a small percentage of students end up making their dream a reality.

With a 529, studying abroad can become a very real option. Funds may be used to help with the following:

• Tuition
• Fees
• Textbooks
• School supplies
• Room and board

o    Find out what the school’s allowance for housing is. Even if the beneficiary lives off-campus, 529 funds can be used up to the allowance level (whether at home or abroad).

With these things in mind, be aware of the institution’s estimated cost of attendance. It’s important not to exceed this estimate where 529 distributions and expenses are concerned. For example, although housing expenses are covered, vacations and traveling are not. Neither are day-to-day expenses.

Your beneficiary’s first points of contact to discuss international student programs and credit eligibility should be a study-abroad coordinator and financial professional at their home school in the US. It’s important to note that the host institution must be approved by the US Department of Education to be eligible for 529 funds.

How is financial aid affected by 529 plans?

Depending on who owns the 529 (the beneficiary, the parents or the grandparents), the impact on financial aid varies. 

Let’s say it’s the parents who own the 529. For purposes of the FAFSA (Free Application for Federal Student Aid), the “base-year,” or prior- year income, is what determines eligibility. So 529 distributions can be used to help pay for a student’s first year of school without impacting financial aid eligibility for the second year.

If a 529 plan is owned by a grandparent or other family member, that can complicate matters where financial aid is concerned. If withdrawals are made from the 529 account, they must be reported in the student’s FAFSA application as as student income, which can reduce financial aid eligibility by 50%.

A common workaround to this complication is to transfer the ownership of the 529 to the beneficiary or to the student’s parent. Once the transfer process is complete, withdrawals may be made. Keep in mind that not all states allow transfer of ownership. Check to see what your state allows, and what other options are available in the case that a transfer is not allowed.

Can 529 funds be used to pay off student loan debt?

Yes. Since the passage of the SECURE Act of 2019, a tax-free withdrawal can be made of up to $10,000 to pay off student loan debt, whether it is used for a grandchild, a child, a spouse or oneself.

Consult with your financial professional

As your beneficiary is making decisions in regard to applying for financial aid or using scholarship or grant funds, talk to your financial professional about how to take your 529 into consideration. There are important varying factors to consider that your financial professional can go over with you to ensure that you come out ahead.

Call or email us:

(877) 615-4116
Monday - Friday 8:00 a.m. - 8:00 p.m. EST
clientservices@collegebound529.com

Or visit Why CollegeBound 529 for more information.