529 savings plans are a popular way to pay for college, but many parents are concerned the funds might limit their child’s ability to receive financial aid. Here’s what you need to know.
With tuition costs rising — and limited federal and state-related financial aid and grants available — parents are responsible for the biggest percentage of college costs. On the whole, family income and savings covered 50%, with 18% of parents taking out loans at an annual average of $13,507,1 according to Sallie Mae in its 2023 report “How America Pays for College.” Tax-advantaged 529 education savings plans are one of the most popular means of setting aside funds to pay tuition, the report points out. But many parents want to know: How could the funds from those plans affect my child’s ability to receive financial aid? We asked Thomas N. Psaltis, director of Education Savings Programs at Bank of America, to weigh in. Check out his insights and strategies below.
It’s true that parents’ income and assets are used to determine a child’s eligibility for needs-based federal grants, loans, scholarships and work-study programs, Psaltis says. But he notes, “Assets, including those in a parent-owned 529 plan, play much less of a role than a parent’s income in determining a student’s federal eligibility for aid.” In general, for financial aid purposes, Psaltis explains, assets “include parents’ checking, savings and brokerage accounts, as well as any real estate, with the exception of a primary residence.” Not included are retirement savings and the cash value of life insurance and annuities. Additionally, only 5.64% of parents’ assets are considered in federal financial aid calculations.
Also worth noting: 529 assets held in grandparents’ names for their grandchildren aren’t considered in federal student aid applications, and because the rules have recently changed, withdrawals from grandparent-owned 529s to pay for education expenses no longer negatively impact the student’s future Free Application for Federal Student Aid (FAFSA) filings.
“Assets, including those in a parent-owned 529 plan, play much less of a role than a parent’s income in determining a student’s eligibility for aid.”
The FAFSA is available online. Check it out and then determine how you can cover the gap between the financial aid your child may receive and the total cost of college. While most families will need to cover some of the cost of college through borrowing, early planning can substantially minimize the amount borrowed and put you and your child in a better financial position.
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1 Sallie Mae, “How America Pays for College,” 2023
You should consider whether your home state or your beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds and protection from creditors that are only available for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency.
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