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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 53%, with 21% of parents taking out loans at annual average of $11,394,1 according to Sallie Mae in its 2021 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. However, payments from the plan used to pay for the student’s education are treated as non-taxable income for the student when they file for financial aid in the following year. Although this negative treatment of withdrawals from grandparent-owned 529 plans was scheduled to be eliminated with the October 1, 2022 Free Application for Federal Student Aid (FAFSA), its implementation has been delayed and is now expected to be implemented by the 2024-25 award year.


“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.”

— Richard Polimeni, head of Education Savings Programs, Bank of America

A 529 approach that might help

“One strategy that families can use to lessen the impact of grandparent-owned 529 assets is to pay for the first couple of years of school from other sources and save the grandparents’ 529 assets for the student’s junior fall semester and senior years,” Polimeni says. Because financial aid applications commonly ask for year-old tax return information — income from 2020 for the 2022-2023 school year — withdrawing 529 funds in later years won’t affect that financial aid formula. “Your financial advisor can help you develop a strategy to navigate these financial aid rules,” he says.


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 can help with strategizing

According to the U.S. Department of Education, the Free Application for Federal Student Aid (FAFSA) is available via a convenient phone app. Check it out, and then schedule time with your financial advisor to determine how you can cover the gap between the financial aid your child may receive and the total cost of college.


You can also use our College Planning Calculator to get a personalized report that suggests how much you might need to save and invest for your children’s education.

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1 How America Pays for College, Sallie Mae, 2021


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