How a 529 Plan Affects your FAFSA

Calculating the amount of financial aid to award a student can be tricky. Many elements are connected and affect each other. One such example is 529 savings plans and the FAFSA. Your 529 plan affects your FAFSA and how much aid you can receive. Here’s a rundown of those details.

A father and daughter reviewing how 529 plan affects the FAFSA

What is a 529 Plan?

A 529 plan “is a tax-advantaged savings plan designed to encourage saving for future education costs.” They’re also known as “qualified tuition plans” and are sponsored by the state or agencies and institutions within the state. The type of 529, prepaid tuition plans, and education savings plans, available depends on the state. You can even opt for 529 plans out of your state – some offer better options and lower fees.

A prepaid tuition plan is a 529 plan that allows the account holder to have units or credits at colleges and universities that are participating. These credits can cover fees and tuition at the participating schools, but not room and board or primary school tuition. Almost all of these are sponsored by state governments and are not guaranteed by the federal government.

Education savings plans are an investment account that can be opened by an individual for a beneficiary that covers everything from tuition to room and board. They can cover up to $10,000 per year and can be used at almost every college and university, including some outside the United States.

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How Does it Affect your FAFSA?

Not every 529 plan’s assets necessarily will affect your FAFSA. How it works depends on who owns the plan.

For 529 Plans Owned by the Student or Parent

Assets in the 529 plan owned by students or parents will be counted on the FAFSA. However, they count as parental assets. The first $10,000 of parent assets aren’t counted towards the Expected Family Contribution (or EFC). The higher the EFC, the less financial aid. The distributions will receive favorable treatment however on the FAFSA.

For 529 Plans Owned by Other Relatives or Other People

However, if the 529 plan is owned by another relative – a grandparent, an aunt or uncle, or someone else – it won’t count as student or parental assets on the FAFSA. However, when the money is taken out in order to cover college expenses and given to the student, it will count as student income. Student income is only assessed at 50%, so for $8,000 withdrawn, only $4,000 will be counted as income. There are ways around this though, especially if you withdraw the money later in the student’s education rather than earlier.

How a 529 Plan Affects your FAFSA

When it comes to a 529 plan, you need to think about how it will affect your FAFSA. Who the plan holder is will have a major impact on how it works and how distribution is counted. It’s also essential to review your options state to state and make the best decision for your education and finances.


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