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The federal government, state governments, and private colleges all have different rules for how they treat 529 assets for financial aid purposes. In some cases, assets in a 529 college savings program may reduce a child’s future eligibility for needs-based financial aid.
The specific impact depends on your financial situation, the type of plan – prepaid tuition or college savings, the type of aid, and the plan owner.
In January 2004, the U.S. Department of Education clarified how 529 programs are treated when determining a student’s eligibility for needs-based federal financial aid. These rules apply only to federal financial aid. States and colleges have their own rules and there are different rules for college savings plans and prepaid tuition plans.
Although the Department of Education letter clarified the rules for now, as always, the rules are subject to change. Moreover, most financial aid is awarded in the form of loans, and non-needs based aid is available if you don’t qualify for needs-based aid.
The Department of Education letter states that the value of a 529 college savings plan will continue to be counted as an asset of the account owner, which is typically a parent. That means the federal formula counts up to 5.64% of parents’ assets when calculating financial aid need, rather than the 35% that is assessed on student assets.
The Department of Education also clarified that qualified distributions from 529 college savings plans are not counted as parent or student income in the determination of federal financial aid. Therefore, withdrawals for qualified education expenses do not reduce a student’s eligibility for financial aid.
The Department of Education clarified that the value of 529 prepaid tuition plans are not counted as an asset of either the owner or the student beneficiary.
However, distributions from a prepaid tuition plan are counted as a resource and applied to a student’s higher education expenses. Therefore, prepaid tuition plan payouts reduce the cost of attendance and a student’s overall financial need dollar for dollar. (With an exception for low-income families who qualify for a Pell Grant.) For example, if a prepaid plan pays out $4,000 in tuition benefits, the student is considered as having $4,000 less need for financial aid.
Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.
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