How can 529s and financial aid work together?

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One of the biggest questions parents have about 529 plans is how they affect need-based financial aid.

When calculating eligibility, FAFSA (Free Application for Federal Student Aid) treats assets and income differently, and it also treats 529 accounts differently depending on who owns them.

Account owner
Dependent student Custodial parent Grandparents/others
Assets Student-owned accounts are counted as parental assets on the FAFSA. Parent-owned accounts are counted as parental assets on the FAFSA. Grandparent-owned accounts are not included in FAFSA asset calculations.
Income Qualified distributions are not counted as income. Qualified distributions are not counted as income. Distributions from a grandparent's plan are counted as "untaxed student income."

Assets. The federal aid formula assesses parental assets at a maximum rate of 5.64%. That means that in general, for every $1,000 in a 529, the "expected family contribution" toward college costs could increase by only $56 at most. Importantly, 529 accounts owned by dependent students are counted as parental assets and assessed at the 5.64% rate — this is significant because other types of student assets can be assessed at the much higher rate of 20%.

Income. Qualified distributions from student and parent accounts are not counted toward a student's income. On the other hand, distributions from accounts owned by grandparents and other relatives are counted as student income, and would factor into calculations for next-year financial aid.

If you're planning to pair a 529 account with other financial aid sources, talk to your advisor about the best way to coordinate your accounts and time your distributions in order to maximize your benefits.

The above is a general description of federal FAFSA rules as of May 2018. Rules are subject to change. Individual schools may have their own rules in regard to need-based scholarships.

Free money: Grants and scholarships

There are thousands of scholarships available from schools, corporations, nonprofits, community organizations and other areas. Some are need-based while others are merit-based.

High school counselors, public libraries and college financial aid offices can be good sources of information about scholarship opportunities. The US Department of Labor also sponsors a scholarship search site.

Learn more about college expenses.

Learn more about Financial aid.

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