529 Plans and Financial Aid

529 Plans sound like a good idea, right? Start socking that money away when Baby Einstein is young, let it grow tax-free, and it'll be there when it comes time to pay for school.

Because these plans are often set up long before - sometimes a decade before - parents have the pleasure of dealing with financial aid forms, not a lot of thought goes into how the funds in a 529 plan affect the financial aid process.


I can hear some of you right now: "Wait a minute! I thought the whole idea of saving for college was that my child wouldn't need financial aid." Or you expect your child to earn enough in grants and scholarships to pay for everything.

The reality is, most student need both savings and financial aid to fund four years (or more) of school and getting those pieces to play together nicely requires a little planning up front.

The most crucial choice is deciding whose name to put on the 529 plan as owner.


If the child is still a dependent, child-owned 529 plans are treated the same as parent-owned accounts (see below), otherwise schools expect you to use 20% of your 529 assets each year in calculating your expected family contribution (EFC) towards the cost of tuition, room & board, and supplies. The 20% rate applies to other non-529 plan assets owned by the child such as savings accounts. IRAs, if the child is fortunate enough to be working and saving, do not count toward the EFC.

The other good news is spending from the 529 is not counted as student income in determining financial aid.

One caveat: prior to the 2009 - 2010 school year, child-owned 529 plans were treated like any other child-owned assets - that is, subject to the same 20% that non-dependent students face. Be aware that rules change, not always to your advantage.

Finally, being owned by the child means that if there are funds left when they reach the age of majority, there is nothing stopping them from paying the taxes and penalties and using those funds for non-educational purposes.


Parent-owned 529 plans get preferential treatment in the financial aid process compared to non-dependent student-owned plans and the same treatment as other (non-retirement) parental assets. On a sliding, income-based scale, only 2.6% - 5.64% of the 529 balance is counted towards the EFC.

Again, spending from the 529 is not counted as student income in determining financial aid.

Parents retain control over the accounts, including the ability to switch beneficiaries if one child in the family is fortunate enough to receive scholarships to the point their need is less than planned for.


You are not required to report (yet) 529 plan assets where the child is beneficiary on the FAFSA form. Therefore, none of the assets held outside of the child/parents counts against your financial aid under the Federal formula.

HOWEVER, and it's a big however, any money spent on the child's behalf out of these accounts count as income in the financial aid calculations, and 50% of the child's income is expected to be included in the EFC the following school year.

Again, owners retain control over the accounts, including the ability to switch beneficiaries.


In general:
  1. Put 529 plan money in the parent's name, not the child's
  2. If the child is working and will not need the money for school, an IRA will take those assets out of the financial aid calculation and may be a better choice than a 529 plan
  3. Schedule withdrawals from grandparent-owned 529 plans as late as possible, preferably the final year of school
Everyone's circumstances are different. To have your's evaluated properly, see a fee-only financial planner in your area.