With the massive expense that college imposes, ensuring every financial opportunity is available is crucial. Learn how 529 plans may impact financial aid.
No matter how vigilantly you save for your loved one’s education, there’s a good chance you’ll need to apply for financial aid to fully cover the cost of college, especially given the huge – and growing – price tags for tuition at many well-known schools. When you do so, it’s important to take into account the factors that could affect the amount of aid you receive so that you can plan your savings strategy accordingly. Because they’re one of the most popular tools for funding a college education, 529 plans are often the subject of questions concerning financial aid. Many families want to know: Does having a 529 plan hurt your chances of getting financial aid? To find out, continue reading as the experts at Sootchy weigh in on this critical topic.
Because the federal government’s pool of money for financial aid is finite, the Department of Education looks at the assets of each applicant to determine who is most in need of assistance. Unsurprisingly, those with plenty of money in their bank account will receive little, if any, aid, while those with few assets get the greatest amount, and the way the agency makes this determination is by calculating a student’s estimated family contribution (EFC).
The way this calculation works is fairly simple: The government will look at the amount of money the student has requested, take a percentage of the total assets available to that student, and subtract that amount from the financial aid they receive. For example, say that you apply for $30,000 in financial aid through FAFSA, and you have $20,000 in a bank account. The government will take a percentage of that asset – say 20%, or $4,000 – and subtract that from the amount of financial aid you receive, giving you $26,000 instead of $30,000.
When filing a Free Application for Federal Student Aid (FAFSA), know that the government will take into account any 529 plans, but only if those plans are owned by the student or their parent. Accounts held by a grandparent, aunt, uncle, or cousin don’t factor into any financial aid decisions, though payments from these accounts can (more on that in a moment). Ultimately, the question of whether or how a 529 plan might hurt your chances of getting financial aid will depend on who owns the account:
Arguably the most advantageous scenario for families is to have a 529 plan in a parent’s name with their child as the beneficiary. When calculating an applicant’s EFC, the Department of Education is pretty lenient regarding the impact of parental assets, especially considering the alternatives.
The first $10,000 or so in parental assets – whether they’re in a 529 plan or any other type of account – will not count toward your EFC, and beyond that threshold, only 5.64% of any parental assets will be considered. If you had $50,000 in a 529 plan, the government would ignore the first $10,000, then reduce your aid by 5.64% of the remaining $40,000, or $2,256.
The next most expensive scenario would be if an independent student applying for financial aid was the account owner for a 529 plan. The same asset protection allowance – that $10,000 mentioned earlier – would apply to the student, but the rest of their assets will be treated very differently.
Rather than having just over 5% of their assets added to their EFC, the government will take 20% of their assets into account – far more than if the 529 plan was in their parent’s name. To stick with the example above, a student with $50,000 in a 529 plan would have their aid reduced by $8,000 instead of $2,256.
Figuring out whether a 529 plan owned by a relative could hurt your chances of getting financial aid can be a tricky task. On the surface, it may seem like the best option because only the assets of a FAFSA applicant and their parents are factored into an EFC calculation, but the truth is a bit more complicated.
Let’s say a grandparent with a sizeable 529 plan goes to pay for their grandchild’s tuition, doling out $50,000 in the process. Although the plan itself will not be considered on a FAFSA submission, the money spent from that account on a student will be counted as part of that student’s income, which is considered as part of FAFSA, and at a very high rate. In the case of a $50,000 payment from a grandparent, 50% would be added to a student’s EFC, reducing the amount of financial aid they receive by a whopping $25,000.
Fortunately, there are workarounds in this scenario that could allow grandparents and other relatives to spend that money on their loved one without hurting their financial aid chances. For instance, 529 plans can be used to pay for student loans, which offers a way for grandparents to help their grandchildren with the cost of education without having to worry about limiting the aid they receive.
Although 529 plans can, in some situations, limit your chances of getting financial aid, setting up your account in a smart way can allow you to sidestep those consequences and fund your child or relative’s college education without hurting them financially. Learn more about the basics of 529 plans or start yours today by visiting Sootchy online or downloading our app on your mobile device.