October 29, 2018
WITH TUITION COSTS RISING—and limited federal and state-related financial aid and grants available—parents are saving more than ever for their kids’ college expenses,1 states Sallie Mae in its 2018 report, “How America Saves for College.” The average amount saved—$18,135—is at its highest level since 2013, according to the report.
Tax-advantaged 529 education savings plans are one of the most popular means of setting aside funds, 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, director of Education Savings Programs for Bank of America, to weigh in. Check out his insights and strategies below.
Assets, including those in a parent-owned 529, play much less of a role than a parent’s income in determining a student’s eligibility for aid.director of Education Savings Programs for Bank of America
It’s true that parents’ income and assets are used to determine a child’s eligibility for federal grants, loans, scholarships and work-study programs, says Polimeni. But, he notes, “Assets, including those in a parent-owned 529, play much less of a role than a parent’s income in determining a student’s eligibility for aid.” For example, between 22% and 47% of parents’ income is factored in the financial aid formula, while no more than 5.6% of parental assets are included. Overall, it’s more advantageous to have those assets than not to.
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 account 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.
“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 and senior years,” Polimeni says. Since aid applications commonly ask for year-old tax return information — income from 2016 for the 2018-2019 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,” Polimeni says.
Polimeni himself 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 to Polimeni when Alexander went off 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,” he says, “because it was coming from this bucket of money that I never considered mine. The psychological benefits of putting money aside are hard to overestimate.”
The U.S. Department of Education recently announced that the Free Application for Federal Student Aid (FAFSA) is now available via a convenient phone app. Check it out, and then schedule some time with your financial advisor to determine how you can cover the gap between the aid your child may receive and the total cost of college.
Use our College Savings Calculator to get a personalized report that suggests how much you might need to save and invest for your children’s education.
For more tips on how to manage the finances of parenthood, check out “The Financial Journey of Modern Parenting.”
1 How America Saves for College, Sallie Mae, 2018
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