How a 529 Plan Affects Financial Aid

Like my blog? Sign-Up for a FREE newsletter! OR Give a ‘Like’ to my FaceBook Page

From Editor: This is a guest post from Pat Singer

Saving for your child’s higher education can be difficult. Even if you make enough to safely stash some away for their college years, it’s hard to decide on a savings plan. A lot of people opt for a 529 savings plan because of the tax advantages. However, there could be repercussions, because having a 529 savings plan could possibly affect your child’s chances of getting financial aid. Following are a few tips on how a 529 plan affects financial aid.

What Is a 529 Savings Plan?

Basically a 529 savings plan is a way to put money away for a college education. The plan is generally managed by a state government or a college or university. A 529 savings plan is available in all 50 states. One benefit of a 529 plan is that you don’t have to go to school in the state in which you paid into the plan. There are two basic types of 529 plans.

The first is a savings plan that works very similarly to a 401k or an IRA. When you deposit money into a 529 plan it is invested in mutual funds, or something similar. Your account goes up or down in value according to how your investment plan performs. The second type of 529 savings plan is a little different. Instead of investing the money, you simply pay a college of your choice all or part of a future tuition at a fixed rate. If your child decides not to attend that particular school, you can roll over the money into a 529 savings plan at a fixed interest rate of 2%.

Needs-Based Financial Aid

Although having a 529 plan in effect seems like a sensible thing to do, it could affect your child’s chance of qualifying for need-based financial aid. Because every facet of your finances are taken into consideration when it comes time to apply for financial aid, having money in a savings account could prevent your child from getting a substantial grant or loan. Because the available money is set aside for those who truly need it, the funds in a 529 plan are considered a parental asset. Even so, it’s far less of a problem than if the student had that money in their own name, because a percentage of those assets are considered available for paying for a higher education, and thus are deducted from the amount of potential aid.

How Potential Aid Is Assessed

The potential for your child to receive financial aid is assessed through a complicated method that determines how much money a family will be able to contribute toward tuition and other college expenses. The less money a family is deemed to be able to supply toward their child’s higher education, the more money will be available through loans and grants. Because money in a 529 plan gives your child a leg up on the competition, they may be considered to have more money available for school than others, thereby reducing their eligibility to receive financial aid.

Parental Assets

Because the funds in the 529 savings plan are in the parent’s name, they are considered to be parental assets as far as the federal government or a college is concerned. When your child fills out the FAFSA (Free Application for Federal Student Aid), the assets of the family are listed. A percentage of those assets are considered to be available for paying for your child’s higher education by the federal government–generally no more than 5.6%. If there is any money listed in the student’s name, it is assessed at a rate of 20%, meaning that parental assets in a 529 plan will cause much less difficulty for your child to receive financial aid than if the money were in their own name.

Low Income Families

If your family has a low income level, but has managed to set aside some money in a 529 savings plan, it could work to your child’s determent regarding financial aid for college. Because lower income families are considered first when it comes to financial aid, having that money in a 529 plan could cause your parental asset assessment to be higher than other low income families without a 529 plan, thereby allowing them to receive preference for financial aid.

Classic reference: The 529 Collage Savings Plan

About the author: Pat writes about online colleges for

Like to Add Your Guest Post here?
This post was written by a guest writer mentioned above. If you’d like to add a guest post in Money Hacker, please check out Write for Us page for details about how YOU can share your knowledge with our community.