More than half of full-time students pay for college with the help of financial aid— a combination of awards including grants and scholarships, work study and loans. But if your family is applying for financial aid and you have a tax-advantaged 529 college savings plan, will that affect the financial aid package your college student receives?

College savings plans have been a huge help for families as the cost of higher education continues to rise. And while a 529 account can affect a financial award package, the impact can vary based on who owns the plan.

• If a 529 plan is owned by a dependent student or a dependent student’s custodial parent, it is reported as a parent asset on the Free Application for Federal Student Aid (FAFSA).
• If a 529 plan is owned by an independent student, it is reported as a student asset on the FAFSA.
• If a 529 plan is owned by a grandparent, a noncustodial parent or anybody else other than the student or a dependent student’s custodial parent, it is not reported as an asset on the FAFSA, instead it is treated as the student's unearned income.

Additionally, parents have an “asset protection allowance,” that shelters a portion of the assets of parents of dependent students on the FAFSA, based on the age of the oldest parent. A similar asset protection allowance applies to independent students. 

What are reportable assets?

Reportable assets include your 529 accounts, bank and brokerage accounts, CDs, stocks, bonds, mutual funds, money market accounts, trust funds, real estate and other investments.

For accounts owned by parents and dependent students, the FAFSA assesses 529 assets at a maximum of 5.64 percent of the value when calculating the Expected Family Contribution (EFC) for financial aid eligibility.  

Here is a simplified example of the impact of a parent-owned 529 account.¹

You file the FAFSA application when your dependent child is a senior in high school. You've exceeded the asset protection allowance and have a 529 savings account with $20,000 in it, of which $10,000 represents your original contribution and $10,000 is earnings.

Year 1: Your child's eligibility for federal financial aid this year will decrease by no more than 5.64% of the account value, or $1,128 ($20,000 x 5.64%). Assume there is no further appreciation in the account and you withdraw $5,000 in the fall to pay for the first semester college bills.

Year 2: You have $15,000 left in the account when your child applies for aid for sophomore year, and it will again be assessed up to 5.64% of the account value, decreasing your federal financial aid that year by $846 ($15,000 x 5.64%).

And although the $5,000 withdrawal included $2,500 of tax-exempt earnings with it, none of it will be counted as income on the FAFSA.

Accounts owned by other parties will impact eligibility for financial aid differently. For more information, consult studentaid.gov or an educational financial aid advisor.

¹ The federal aid formula is more complicated than this example, this is an illustration of how to calculate impact. Source: Savingforcollege.com