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Do 529 College Savings Plans Affect Financial Aid?

Your can influence how a 529 plan is calculated for financial aid eligibility

When saving for college, 529 accounts owned by either a parent or dependent child are considered "parental assets" in financial aid calculations. In determining financial aid awards, parents are expected to contribute up to 5.64% of their assets toward college bills, according to calculations for the Free Application for Federal Student Aid (FAFSA). Bear in mind each individual college reserves the right to apply its own standards that may not be based on the federal formula. Anyone may deposit money in an existing 529 account -but only the account owner may determine how the funds are invested, change the designated beneficiary, or control fund distribution.

If you are a grandparent, aunt or uncle, or family friend, you can open a 529 account directly and name any loved one as the beneficiary. As the account owner, you remain in full control over account management, investment, and distribution - and, depending on where you live, your contributions may be tax deductible for state tax purposes. But, it may take a bit more planning to help maximize your loved one’s potential financial aid eligibility.

As of July 2009, money distributed from a grandparent’s plan to help pay a student’s college bills is considered "untaxed student income" and must be reported on the following year’s FAFSA form1. Since students are expected to put half of their income (which is calculated separately from "assets") toward college bills, the distribution of 529 college savings account funds as "income" may impact aid eligibility more significantly.

College financial aid expert Mark Kantrowitz, publisher of Edvisors Network, a group of more than a dozen websites about college admissions and financial aid, suggests the following approaches to getting the most out of a 529 plan while maximizing your loved one’s potential financial aid.

Delay 529 plan withdrawals for your loved one until after January 1 of his or her junior year in college.

Your grandchild files his or her final FAFSA form that spring (reporting income and distributions from the previous calendar year), so your 529 distributions never need to be reported2.


Transfer ownership of your 529 plan to a parent or your grandchild.

If you have a significant amount saved in your plan or your grandchild needs your 529 funds sooner than the spring of her junior year, this is a good solution. If the parent or dependent child takes ownership of the account, it becomes a parental asset in financial aid formulas. If an independent child takes ownership, it becomes the student’s asset. In both cases, the plan will be counted more favorably in financial aid calculations than it would be if a grandparent owned it.

Some states won’t allow you to change 529 account owners. In that case, Kantrowitz suggests transferring your plan to a state that does allow changes, then making the ownership transfer. Owners can normally roll over money tax-free from one state plan to another as often as once every twelve months for the same beneficiary. However, it is best to check with your own state since certain states may tax outgoing rollovers.


Set up a custodial 529 plan, with you as custodian and your grandchild as the owner/beneficiary.

This works wells for grandparents who want control of 529 funds and distributions, but don’t want to impact financial aid. Custodial accounts are technically considered a parental asset in financial aid formulas (again, favorable treatment), even though parents have no control over the account.

Since these 529 decisions can be complex, check with your financial or tax advisor to be sure you understand your choices and their implications.

If you think a 529 plan might be a good option for your college savings goal, note that fees and expenses can vary considerably from plan to plan. The investment options also differ among plans. Be aware that advisor-sold plans - in which you select a plan based on the advice you receive from an investment advisor or brokerage firm - generally cost more than direct-sold plans, in which you choose a plan directly from a financial services company acting on behalf of the state sponsoring the plan. (AARP College Savings Solutions from TIAA contains information about direct-sold plans only. As such, broker-related sales charges do not apply.)

1In September 2015, the U.S. Dept. of Education announced new incoming reporting rules that will impact aid applications for the 2017-18 school year. FAFSA applicants will report income from two years prior instead of one year prior. Additionally, they will have the option of applying for aid further in advance of the need. By withdrawing money after the reportable year, grandparents may avoid any impact their 529s might otherwise have had through either asset or income inclusion. SOURCE: Office of the U.S. Department of Education.

2Beginning with aid applications for the 2017-18 school year, applicants needn’t wait as long to withdraw money from a grandparent-owned 529 plan account to avoid aid impact. For example, they might be able to withdraw money as early as the second semester sophomore year. SOURCE:

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