Is My Financial Aid Impacted If I Invest In A 529 Savings Plan?

Savings Plan and Financial Aid

The primary concern for anyone that is planning for college is how to incorporate all assets, including cash and invested savings into their overall financial portfolio as it will be seen by financial aid agencies. We have all heard of those student who have families that make too much for financial aid, but not enough to actually pay for college. Fortunately, the 529 plan can be set up in such a way as to have a minimal impact on your overall financial aid picture. This is not to say that the rules will never change, but as of the writing of this article, this is how it will affect you. Remember that each state, and even each school, is different in how they calculate your financial aid needs. You need to consult with your specific institutions financial aid office to determine their precise methods of calculation.

The first thing you need to know is that the prepaid tuition 529 plan is treated differently than the 529 savings plan on the federal level. Unfortunately, on the state level there are about as many rules as there are states. The important thing to note about a financial aid application is if the application requests information about all available assets that are specifically set aside for your education or just those of your parents and possibly grandparents. This is important because a qualified donor for your 529 plan does not have to be a relative. Therefore if the financial aid application does not explicitly request information about available or set aside assets for your education, that is held by others, then the 529 plan held by others may not be included in your calculation.

For most college financial aid calculations, the prepaid tuition option is looked at as fixed dollar contribution and not as a percentage of assets. This is in juxtaposition to the 529 savings plan which is normally looked at as a parental asset and therefore is not calculated as a fixed dollar deduction, but as a percentage of overall assets. This is fortunate because prior to the 529 savings plan, all college savings plans were looked at as fixed dollar contributions.

In other words if your college expenses were calculated as being $15,000 for a specific year and you had $8,000 in your non 529 college savings plan prior to the calculation, then the $8,000 fixed dollar amount would be deducted from your need based analysis. This would mean that they would see your actual need as $7,000. But with the 529 plan, the $8,000 is considered a parental asset and is therefore used to reduce the expense as a percentage of the account balance. The percentage used for each state is different, but as an example, if it were 10% then the $15,000 overall need would be reduced by $800 leaving $14,200 in need. As you can see the 529 plan provision is much more advantageous to your overall financial need analysis than previous college savings plans and even more advantageous than the 529 pre paid tuition plan.

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