How Does a 529 Affect Financial Aid?

In short, even though a 529 account is for a child, it is considered a parental asset and is figured into the Expected Family Contribution, which affects financial aid awards. Below I explain the impact of a 529 account, or multiple 529 accounts, on the amount of financial aid your child could receive in more detail.

Benefits of a 529 Account

A 529 account is set up by the state and is specifically for your child’s college education. You can save money in this account without having to pay taxes on the earnings. If you have three children, you can have a 529 account for each child. If you have 529 accounts for multiple children, you can switch funds from one child’s account to another without there being any kind of penalty, at least at this point in time.

A 529 Account Is a Parental Asset

While there are great benefits to investing in a 529 account, there is a drawback you may not be aware of: the plans are considered in financial aid amount determinations. I’m not a financial advisor, but I had 529 accounts for my children and I’m going to explain in simple terms how these plans affect financial aid awards.

The parent is typically the owner of the 529 account with the child being the beneficiary. Because of this technicality, the account is considered a parental asset. Yes, I know you are saying, “But these are for the children!” Unfortunately, the government includes a percentage of the monies in these accounts in the overall aid calculation.

How a 529 Account Is Addressed in Financial Aid Calculations

The 529 account, or multiple accounts if you have more than one, gets grouped in with all the other assets you may have in non-retirement brokerage investment, cash, savings and checking accounts. All of those assets are assessed at about 5%. What does this mean? As an example, say you have $100,000 in 529 accounts for all of your children – because remember it’s a parental asset – so you have to include all of your 529 accounts not just the account of the child for whom you’re filling out the financial aid application – it will be assessed at a rate of about 5%, so approximately a little over $5000 is going to be tacked onto your Expected Family Contribution. Your Expected Family Contribution is what the federal government and/or institution says you can pay for one year of your child’s college education. There are lots of different factors that go into calculating that Expected Family Contribution, such as income and assets, and one of those assets is your child’s 529 account. The Expected Family Contribution is going to be changed in October 2022 for the 23 to 24 academic year and called the Student Aid Index, but that’s a whole other Tuesday Talks with Liz video.

So don’t be caught off guard when filling out the FAFSA or other financial aid forms. You will need to input information on ALL of the 529 accounts that you own and be prepared for having a portion of those accounts affect any financial aid award.

Looking for help with the college search and application process? We help students and families through the entire college planning journey – from search, applications and essays to interview prep, financial aid consultation and final school selection.

Contact us at info@signaturecollegecounseling.com or by phone, 845.551.6946. We work with students in person, through Zoom, over the phone, and by email.