Does a 529 Plan Count Against Financial Aid?

A 529 plan is a popular savings vehicle for future education expenses. Many families wonder how these savings might influence their eligibility for financial aid when the time comes to apply for college. Understanding the rules governing 529 plans and their interaction with financial aid applications, especially the FAFSA, can help families make informed decisions. This article clarifies how 529 plans are considered within the financial aid process.

529 Plan Asset Assessment for Financial Aid

When determining financial aid eligibility, the value of a 529 plan is assessed as an asset. Most 529 plans are owned by a parent for a dependent student. In such cases, the funds held within the 529 plan are considered a parental asset on the FAFSA. This classification is favorable because parental assets are assessed at a much lower rate than student-owned assets.

Specifically, up to 5.64% of the value of parental assets, including parent-owned 529 plans, is counted towards the Student Aid Index (SAI), which replaced the Expected Family Contribution (EFC). For example, a $10,000 parent-owned 529 plan could increase the SAI by $564, reducing need-based aid. This low assessment rate helps minimize the negative impact on financial aid eligibility compared to other asset types.

Impact of 529 Plan Ownership on Financial Aid

The ownership structure of a 529 plan impacts how it is treated in financial aid calculations. A 529 plan owned by a grandparent or other non-parent relative is not counted as an asset on the FAFSA. This means the value of these plans does not directly increase the Student Aid Index (SAI). This distinction can be beneficial for families seeking need-based aid.

Conversely, if a 529 plan is owned directly by the student (and not the parent), it is considered a student asset. Student assets are assessed at a higher rate, 20% of their value, compared to parent assets. This higher assessment means that a student-owned 529 plan could reduce financial aid eligibility. For instance, a $10,000 student-owned 529 plan could increase the SAI by $2,000, reducing aid.

Reporting 529 Plans on Financial Aid Applications

When completing the FAFSA, 529 plans must be reported following specific procedures. For a dependent student, the value of all parent-owned 529 plans, regardless of which child is the beneficiary, must be reported as parental investments. This includes all accounts owned by the parent for any member of the household, and they are listed in the “Parent Assets” or “Investments” section of the FAFSA. The reported amount should reflect the account balance as of the FAFSA filing date.

Grandparent-owned 529 plans are not reported as assets on the FAFSA. This is because the FAFSA primarily focuses on assets owned by the student or the custodial parent. If a 529 plan is owned by an independent student, the total value of the plan is reported as a student investment on their FAFSA. Accurate reporting ensures proper assessment for aid eligibility.

How 529 Plan Distributions Affect Future Aid Eligibility

Qualified distributions from parent-owned or dependent-student-owned 529 plans, when used for eligible education expenses, are not counted as income on the FAFSA. This means that withdrawals from these accounts for tuition, fees, or other qualified costs do not negatively impact financial aid eligibility. This is an advantage, allowing families to utilize their savings without incurring a penalty on future aid.

Historically, distributions from non-parent owned 529 plans were considered untaxed student income on the FAFSA in the year following the distribution. This untaxed income could be assessed at a high rate, reducing financial aid eligibility by as much as 50% of the distribution amount. However, starting with the 2024–2025 academic year, the FAFSA Simplification Act changed this rule. Qualified distributions from grandparent-owned 529 plans are no longer reported as untaxed student income and do not affect financial aid eligibility. This change simplifies financial aid for families receiving support from grandparents.