Does a 529 plan affect financial aid?

Article content

A 529 college savings plan can be a powerful tool when saving for future education expenses because investments in the plan can increase tax-free, but many savers don’t take full advantage of all the benefits that 529 plans have to offer.

Article content

Article content

One common deterrent to investing through a 529 plan is the concern that assets in a 529 account will reduce financial aid eligibility. While it’s true that 529 assets have an impact on financial aid, the effect is likely smaller than you think.

Article content

Article content

Do 529 plans affect financial aid?

Article content

Article content

The short answer is yes. An increase in the means to fund higher education naturally means the beneficiary is eligible for less need-based aid.

Article content

However, assets in a 529 plan have a lesser impact on financial aid packages than income does. A student’s federal financial aid is based on an estimate of what a family can contribute annually from their income and assets. Income is the largest portion of this measurement of a student’s ability to pay for college, which is represented by the Student Aid Index, or SAI, on the Free Application for Federal Student Aid, or FAFSA. The SAI replaced the expected family contribution, which was previously used on the application.

Article content

Typically, the SAI calculation expects parents to use 25% to 35% of their adjusted available income to cover college costs, though that number can go as high as 47%. Parental contribution from assets, including 529 account balances, is assessed at a much lower maximum of 5.64%. So, if a family has a 529 account with $10,000, this raises the expected family contribution by at most $564 and reduces the federal aid package by the same amount.

Article content

Article content

A 529 plan’s impact depends on who owns the account

Article content

The impact of 529 assets on a beneficiary’s financial aid package depends on who owns the account. As outlined above, if the plan is owned by the beneficiary’s parent, then 5.64% of the account’s value is considered in the SAI, which determines a student’s financial aid eligibility on the FAFSA.

Article content

On the other hand, if the plan is owned by the student, then up to 20% of the account value may be considered in calculating financial aid eligibility.

Article content

With changes to the federal student aid calculation as part of the FAFSA Simplification Act that took effect for the 2024-25 academic year, 529 accounts owned by grandparents or other relatives are not considered student assets and won’t impact the beneficiary’s financial aid.

Article content

Siblings’ 529 assets don’t count for federal financial aid

Article content

After the FAFSA Simplification Act, assets in 529 accounts are counted as parental assets only for the beneficiary of the account. That means, if you have 529 accounts set up for your other children, the assets in those accounts are no longer counted toward the expected family contribution. As mentioned above, accounts owned by grandparents or other relatives will also be excluded from determining federal financial aid eligibility.