Does Money In A 529 Plan Affect Financial Aid

how does a 529 plan affect fafsa and financial aid

At that place are many benefits to 529 higher savings plans. They provide tax and financial aid advantages to families who salvage for college.

Saving for college reduces student loan debt at graduation and increases higher choice. But it can also affect eligibility for need-based fiscal help.

Depending on who owns the 529 program account, a 529 college savings plan may touch either the income or the assets reported on the Free Application for Federal Student Aid (FAFSA). In this guide, we'll explore how a 529 plan tin bear upon your FAFSA and fiscal assistance eligibility.

How Does A 529 Program Affect Your FAFSA?

A 529 programme could affect either the "assets" or "income" portions of your FAFSA. Hither's how it could impact your assets reporting:

Get-go, if a 529 program is owned by a dependent student or a dependent student's parent, it'south reported equally a parent asset on the FAFSA and qualified distributions are ignored.
2d, if a 529 programme is owned by an independent pupil, information technology's reported every bit a student nugget on the FAFSA and qualified distributions are ignored.
Third, if the 529 plan is endemic by anyone else, it'south not reported as an asset on the FAFSA.

Next, allow's consider qualified distributions:

If the recipients are students or custodial parents, qualified distributions are non reported equally income.
But if the recipients are anyone else, qualified distributions count as untaxed income to the student. This includes 529 plans owned by the non-custodial parent if the student's parents are divorced or separated.

This table provides a quick overview of how 529 plan account ownership affects the reporting of the 529 plan on the FAFSA:

Business relationship Possessor (Current Rules)	Reporting As An Asset	Qualified Distributions
D ependent Student (Custodial 529 Program)	Parent Nugget	Not Reported
Dependent Pupil's Parent	Parent Asset	Not Reported
Contained Pupil	Student Asset	Not Reported
Anyone Else (Grandparent, Aunt, Uncle, Cousin, Non-Custodial Parent)	Non Reported	Greenbacks Support (Untaxed Income To The Student)

Finally, we'll discuss not-qualified distributions. The earnings portion of a not-qualified distribution volition be included in the recipient's adapted gross income on their federal income revenue enhancement return, regardless of who owns the account.

Simply the income may or may not be reported on the FAFSA, depending on who receives information technology. Here's how it works:

If the non-qualified distribution is paid to the student or paid direct to the college, it's included in pupil income.
If the distribution is paid to the account owner, it's included in the business relationship owner's income.

Then if a dependent educatee'southward parent is the account owner, the non-qualified distribution will be reported in parent income on the FAFSA. Just if the account owner is anyone else, it will not be reported as income on the FAFSA.

How Does A 529 Plan Affect Your Fiscal Aid Eligibility?

The expected family contribution (EFC) is based on:

Assets as of the date the FAFSA is filed
Income from ii years prior – the prior-prior year – as reported on federal income tax returns.

This means that if your 529 plan is reported as an asset or income on your FAFSA, it could reduce your eligibility for demand-based financial aid. This table shows how 529 plan assets can bear on your aid eligibility:

Touch Of 529 Plan Assets On Need-Based Fiscal Assistance Eligibility
Asset Owner	Reduction In Eligibility For Need-Based Financial Aid
D ependent Educatee	twenty% of the asset value (no asset protection assart)
Dependent Student's Parent	Up to 5.64% of the nugget value, subsequently subtracting a small asset protection allowance
Independent Student With Dependents Other Than A Spouse	Up to 3.29% of the asset value, afterwards subtracting a pocket-size asset protection assart
Independent Student Without Dependents Other Than A Spouse	20% of the asset value, subsequently subtracting a small asset protection allowance

And this table shows how income from a 529 programme reduces your eligibility for need-based financial aid, depending on who received the income:

Impact Of 529 Plan Income On Need-Based Financial Assist Eligibility
Income Recipient	Eligibility Reduction
D ependent Student	50% of the income above the income protection allowance (IPA)
Parent	Upward to 47% of the income above the IPA
Independent Pupil With Dependents Other Than A Spouse	Upward to 47% of the income in a higher place the IPA
Independent Student Without Dependents Other Than A Spouse	Upward to 50% of the income in a higher place the IPA

Here'southward how the income protection allowance (IPA) is calculated for each type of 529 programme owner:

How Income Protection Allowance (IPA) Is Calculated
Income Recipient	IPA
D ependent Pupil	$half-dozen,970 in 2021-2022
Parent	Depends on household size and the number of children in college in the household size. The IPA for a family of four with one kid in college is $29,890 in 2021-22.
Independent Student With Dependents Other Than A Spouse	Depends on household size and the number of college students in the household size. The IPA for a family of four with one in college is $42,200 in 2021-22.
Independent Educatee Without Dependents Other Than A Spouse	If the student is single or the pupil'southward spouse is enrolled in college on at least a one-half-fourth dimension footing, the IPA is $10,840 in 2021-22 Otherwise, the IPA is $17,380 in 2021-2022.

Note that the contribution from available income may be divided by the applicable number in higher for parents and contained students. And that would, in turn, reduce the affect of income and assets on the EFC.

Examples Of How A 529 Plan Can Affect Your FAFSA And Fiscal Assistance

Suppose there is $25,000 in a 529 programme and the full amount is withdrawn in a qualified distribution. The impact on aid eligibility will be as follows. If the 529 plan is owned by:

A dependent student, information technology will reduce assist eligibility past every bit much as $i,410. (5.64%)
A dependent pupil's parent, information technology will reduce aid eligibility by equally much as $1,410. (5.64%)
An independent student without dependents other than a spouse, information technology will reduce aid eligibility past as much every bit $5,000. (xx%)
An contained educatee with dependents other than a spouse, it will reduce aid eligibility past every bit much equally $823. (3.29%)
Someone other than the educatee or a dependent student's parent, such equally a grandparent or non-custodial parent, it will reduce assistance eligibility by as much as $12,500. (50%)

Compare this with money in a custodial bank or brokerage account, such as an UGMA or UTMA business relationship, which reduces assistance eligibility by as much as $five,000. (20%)

How To Avoid The Negative Impacts Of 529 Plans On Eligibility For Need-Based Financial Aid

There are a few workarounds if a 529 plan is owned past someone other than the student or the parent, such as a grandparent. These workarounds tin avoid the harsh affect of the 529 plan on eligibility for need-based financial aid.

Annotation that if the student and parents practice not know about a 529 plan, they aren't required to report it on the FAFSA. But qualified distributions from such a 529 programme must exist reported as untaxed income to the student, regardless of whether the family knows about the source of the coin.

For case, gifts from a grandparent and distributions from a grandparent-owned 529 programme have the aforementioned impact on assistance eligibility. But not-qualified distributions retained by the account owner do not need to be reported considering the student and parents will not be aware of these distributions.

Nevertheless, information technology's improve if the account owner makes the student and parents enlightened of the existence of the 529 plan. This creates an expectation that the student volition go to college, significantly increasing the likelihood that the student will enroll in and graduate from higher. If you're worried almost how a 529 programme will affect your FAFSA and fiscal assistance eligibility, here are a few strategies to consider.

Change The Account Owner From The Student To The Parent

Some 529 plans practice non allow a modify in account owner, except upon decease or divorce. Merely, if this is permitted, changing the account owner avoids the fifty% reduction based on distributions. Instead, the reduction would be up to 5.64% based on avails.

Rollover A Year's Worth Of 529 Plan Funds To A Parent-Owned 529 Plan After Filing The FAFSA

Since the rollover occurs after filing the FAFSA, the coin is not reported as an asset on the FAFSA. Since the distribution to pay for college costs comes from a parent-owned 529 plan, the distribution is not reported as untaxed income to the educatee on a subsequent twelvemonth'due south FAFSA.

Notation that some states treat an outbound out-of-state rollover equally a not-qualified distribution. So the parent-owned 529 plan should exist in the same state as the original 529 programme to avoid state recapture rules. (An out-of-country rollover is non considered a distribution from the federal perspective.)

Wait Until January 1 Of The Sophomore Year To Take A Distribution

Income on the FAFSA is based on income during the "prior-prior" year. So if the student will graduate in four years, in that location will be no subsequent year's FAFSA on which to report a distribution on or after Jan 1 of the sophomore year in higher.

If the student volition take five years to graduate (e.yard., for an engineering degree), wait an additional twelvemonth to accept the distribution. This means the family unit will have to discover a dissimilar way of paying for higher for the first i.5 years.

Wait Until After Graduation To Take A Distribution

This pick could be worth considering if information technology's if it is unclear how long it will take the educatee to graduate. A qualified distribution tin exist used to repay upwardly to $x,000 in qualified education debt each for the beneficiary and the casher's siblings.

1 tin can also use it to repay upwards to $x,000 in parent loans past changing the beneficiary of the 529 plan to the parent. The $10,000 limit is a lifetime limit, aggregated over all 529 plans.

Finally, one can take a non-qualified distribution to pay any additional costs. Merely the earnings portion of a not-qualified distribution will exist subject field to ordinary income revenue enhancement at the recipient'due south rate, plus a 10% revenue enhancement penalty. Recapture of country income revenue enhancement benefits may also apply.

How Will 529 Plans Affect The New FAFSA?

The Consolidated Appropriations Act, 2021 will simplify the FAFSA starting with the 2024-25 FAFSA. The new FAFSA will drop the question about greenbacks support (untaxed income) received by the student.

This ways that distributions from 529 plans endemic by third parties, will no longer be reported equally untaxed income on the FAFSA. Below, Tabular array 1 is shown over again, with the 2024-2025 changes highlighted in red.

Business relationship Owner (2024-25 FAFSA)	Reporting Every bit An Asset	Qualified Distributions
D ependent Student (Custodial 529 Plan)	Parent Asset	Not Reported
Dependent Student'due south Parent	Parent Asset	Non Reported
Independent Student	Student Nugget	Non Reported
Anyone Else (Grandparent, Aunt, Uncle, Cousin, Not-Custodial Parent)	Not Reported	Non Reported

Since the 2024-25 FAFSA is based on income in 2022, this means that distributions from grandparent-endemic 529 plans starting in 2022 will no longer affect assistance eligibility. This assumes, of course, that there won't be any farther delays in implementation of the simplified FAFSA.

Related: How To Pay For Higher If Yous Don't Have Plenty Financial Assistance

Mark Kantrowitz is an expert on student financial assist, scholarships, 529 plans, and student loans. He has been quoted in more than than 10,000 paper and magazine manufactures about college admissions and fiscal assist. Marking has written for the New York Times, Wall Street Periodical, Washington Post, Reuters, U.Southward. News & World Report, MarketWatch, Money Magazine, Forbes, Newsweek, and Fourth dimension. You can discover his work on Student Aid Policy here.

Mark is the author of five bestselling books about scholarships and financial help and holds seven patents. Mark serves on the editorial board of the Journal of Pupil Financial Aid, the editorial advisory lath of Bottom Line/Personal, and is a fellow member of the lath of trustees of the Center for Excellence in Instruction. He previously served every bit a member of the board of directors of the National Scholarship Providers Association. Mark has 2 Bachelor'southward degrees in mathematics and philosophy from the Massachusetts Institute of Applied science (MIT) and a Master'due south degree in computer scientific discipline from Carnegie Mellon University (CMU).