529 accounts may affect prospects for need-based financial aid
BY KIMBERLY LANKFORD Money Power
Sunday, December 02, 2012
12/02/12 at 3:37 AM
I opened a 529 account for my granddaughter. Will this affect her prospects for financial aid?
A grandparent-owned 529 is not reported as either a parent or student asset on the Free Application for Federal Student Aid.
That's a big loophole because parents are expected to contribute up to 5.6 percent of their assets toward college bills, according to the federal financial aid formula, and students are expected to contribute 20 percent of assets.
As soon as the money from the grandparent-owned account is distributed, however, it is considered student income and must be reported as such on the next year's FAFSA, says Deborah Fox, president of Fox College Funding in San Diego. The same is true for 529 withdrawals from accounts owned by anyone who isn't the parent. Students are expected to contribute 50 cents of every dollar of income toward their college bills, after an allowance of about $6,000. (The CSS/Financial Aid Profile, an aid application used by some private schools, also assesses student income but does not provide an allowance.)
Families who expect to qualify for need-based aid should delay withdrawals from the grandparent 529 until the last financial-aid form has been filed - after Jan. 1 of the student's junior year of college, Fox says. That way, the distribution won't affect the award.
If you need to access the account before then, switch the account owner from the grandparent to the parent, if the plan allows it. (If it doesn't, transfer the account to another state's plan that does; see tulsaworld.com/collegesaving for each state's rules.)
Either way, the money in the 529 would be counted as the parent's assets, but the withdrawals would not be reported as income on the financial-aid application.
Original Print Headline: 529S May Affect Need-Based Aid
Kimberly Lankford is a contributing editor at Kiplinger's Personal Finance magazine. To send her a question or comment, go to tulsaworld.com/kiplingerfeedback.