529’s and Financial Aid

April 28, 2020

College is expensive. In Massachusetts, UMass Amherst, a popular state school costs $30,790 per year for in-state students. A private option, Boston College, costs between $69,500 and $71,100 per year. And it’s getting pricier since college costs increase faster than regular inflation. Families need to plan ahead. 529’s and financial aid are a big part of that planning.

The best way to save for college is through a 529 plan. 529’s provide growth and tax benefits.

  • You could receive a state income tax deduction for some of your contribution depending on where you live.
  • Your contributions are invested and grow tax-deferred.
  • Withdrawals for qualified education purposes are tax-free.
College

However, one frequently asked question is how 529 plans impact financial aid.

The parents I work with want to save for college, but they do not want to miss out on help paying for it.

Here’s a guest post by Eric Stutman, the founder of Top Choice College Consulting, addressing 529’s and financial aid.

Ownership of a 529 plan impacts college financial aid

Case 1 (most common and most desirable): Parent-owned 529 plan

When parents own the 529 plans, the government (and colleges) expect families to contribute approximately 5.64% of this and other parent-owned assets towards college each year.

Case 2: Student-owned 529 plan

When students own the 529 plans, the government (and colleges) expect families to contribute approximately 20% of this toward college each year.

Case 3: Grandparent or other relative-owned 529 plan

When 529 plans are owned by grandparents, distributions to pay for college are considered part of the student’s untaxed income. The government (and colleges) expect families to contribute approximately 50% of this toward college each year.

After Case 1, the other two cases aren’t ranked because what’s best depends on your situation. Since distributions from grandparent-owned 529 plans are considered student income, they shouldn’t be used early in college. However, they’re not counted before they’re used, so they’re better than a student-owned 529 plan in the third or fourth year of school when these distributions won’t appear on the FAFSA.

It’s also worth discussing with your children and their financial advisor to see what ownership works best for financial aid.

Conclusion

529’s are great for college savings, and you don’t have to worry about losing out on financial aid. We recommend that parents own them. You can change ownership on a grandparent owned plan, or make distributions. If you don’t, you can also use them in later college years when these distribution won’t appear on the FAFSA form.

 

Suggested Further Reading

Your Wealth Management Checklist – Wondering if your finances are in good shape and looking for a resource to make sure that they are? This wealth management checklist is a good place to start a financial check-up.