Could a 529 education savings plan affect financial aid?
The answer is maybe — but its impact is likely to be minimal and shouldn’t discourage you from saving and investing for your child’s future.
With tuition costs rising — and limited federal and state-related financial aid and grants available — parents are responsible for the biggest percentage of college costs. On the whole, family income and savings covered 54%, with 18% of parents taking out loans at annual average of $10,827,1 according to Sallie Mae in its 2022 report “How America Pays for College.” Tax-advantaged 529 education savings plans are one of the most popular means of setting aside funds to pay tuition, the report points out. But many parents want to know: How could the funds from those plans affect my child’s ability to receive financial aid? We asked Richard Polimeni, head of Education Savings Programs at Bank of America, to weigh in. Check out his insights and strategies below.
When it comes to eligibility, do assets or income matter more?
It’s true that parents’ income and assets are used to determine a child’s eligibility for needs-based federal grants, loans, scholarships and work-study programs, Polimeni says. But, he notes, “Assets, including those in a parent-owned 529 plan, play much less of a role than a parent’s income in determining a student’s eligibility for aid.” In general, for financial aid purposes, Polimeni explains, assets “include parents’ checking, savings and brokerage accounts, as well as any real estate, with the exception of a primary residence.” Not included are retirement savings and the cash value of life insurance and annuities.
Also worth noting: 529 assets held in grandparents’ names for their grandchildren aren’t considered in federal student aid applications and because the rules have recently changed, withdrawals from grandparent-owned 529s to pay for education expenses no longer negatively impact the student’s future Free Application for Federal Student AID (FAFSA) filings.
“Assets, including those in a parent-owned 529 plan, play much less of a role than a parent’s income in determining a student’s eligibility for aid.”
Not all benefits of 529 plans are financial
Polimeni started putting money into a 529 education savings plan as soon as his son Alexander was born. The value of that advance planning became fully evident when Alexander went to study aerospace engineering at college in another state. “When I had to write that first check to the school, it was a lot less painful,” Polimeni says, “because it was coming from this bucket of money that I never considered my personal savings. The psychological benefits of putting money aside for the specific need are hard to overestimate.”
Useful tools that can help with strategizing
The FAFSA is available online. Check it out and then determine how you can cover the gap between the financial aid your child may receive and the total cost of college.
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