529 Plans and Financial Aid: What Parents Need to Know

529 plans are a tax-advantaged way to save for education, but they can impact financial aid eligibility. Here's what you need to know:

• Parent-owned 529 plans are assessed at only 5.64% on the FAFSA, making them a low-impact option for aid calculations.
• Grandparent-owned 529 plans are not counted as assets on the FAFSA, and starting with the 2024-25 FAFSA, withdrawals won't count as income either.
• Student-owned 529 plans are assessed at 20%, making them less favorable for financial aid.
• Income matters more than assets for aid eligibility. For example, $100,000 in income affects aid more than $100,000 in a 529 plan.

Quick Comparison

Ownership Type	FAFSA Asset Assessment	FAFSA Distribution Impact	Best For
Parent-owned	5.64%	Not reported as income	Balancing control and aid
Grandparent-owned	Not counted	Not reported as income	Maximizing aid eligibility
Student-owned	20%	Not reported as income	Least favorable for aid

529 plans are a smart way to save for college, but ownership and timing of withdrawals can make a big difference in financial aid outcomes. Start planning early to balance savings and aid eligibility.

How 529 Plans Affect Financial Aid Eligibility

529 plans have a relatively small impact on financial aid eligibility, but understanding how they are treated can help you make smarter decisions about saving and account ownership. Let’s break down how ownership influences aid calculations.

529 Plans as Parent Assets on FAFSA

When a parent owns a 529 plan, it’s reported as a parental asset on the Free Application for Federal Student Aid (FAFSA). This is a good thing because parental assets are assessed at a much lower rate than student-owned assets. Specifically, parental assets are evaluated at 5.64%, compared to 20% for student assets.

For example, a $50,000 parent-owned 529 plan would add only $2,820 (5.64%) to the Student Aid Index. If that same account were treated as a student-owned asset, it would contribute $10,000 (20%) instead. That’s a significant difference.

This lower assessment rate applies to various parental assets, including checking and savings accounts, brokerage accounts, and most real estate (excluding your primary home). However, retirement accounts, life insurance cash value, and annuities are excluded from these calculations.

Parent vs. Grandparent Account Ownership

Ownership of a 529 plan matters. For parent-owned 529 plans, the assets are treated as parental assets and assessed at the favorable 5.64% rate. Plus, when parents withdraw funds from these accounts to cover college costs, those withdrawals aren’t counted as income on the FAFSA.

Grandparent-owned 529 plans, on the other hand, are treated differently. These plans are not counted as assets on the FAFSA, which means they don’t affect the initial financial aid calculation. Starting with the 2024-2025 FAFSA, distributions from grandparent-owned 529 plans will no longer be reported as income, removing a previous disadvantage. Before this change, such distributions were considered untaxed student income, with 50% of the amount impacting the Expected Family Contribution. However, some colleges that use the CSS Profile for institutional aid may still factor in distributions from grandparent-owned 529 plans when determining their own financial aid awards.

Income vs. Assets in Financial Aid Calculations

When it comes to financial aid, income plays a much bigger role than assets. The FAFSA primarily looks at your "base-year income", which is typically the tax year two years before the academic year you’re applying for. For example, if you’re starting college in fall 2025, FAFSA will assess your 2023 tax return. This income includes wages, investment returns, business earnings, and other sources. Importantly, 529 distributions used for qualified education expenses are not counted as income.

Here’s why this matters: a family with $100,000 in annual income will see that income directly affect their aid eligibility. Meanwhile, only $5,640 of a $100,000 529 plan (5.64%) would be considered in the aid formula. That’s a much smaller impact.

With their low asset assessment rate and tax-free withdrawals for education expenses, 529 plans can help reduce the need for expensive student loans.

How to Report 529 Plans on Financial Aid Forms

When it comes to reporting 529 plans on financial aid forms, accuracy is key. The process varies depending on who owns the account and which form you're completing.

Reporting 529 Plans on the FAFSA

For 529 plans owned by parents, these must be reported as parental assets on the FAFSA. If you're a dependent student, include all parent-owned 529 plans on FAFSA question 91. This includes accounts set up in your name through UGMA/UTMA. You'll need to report the current balance as of the date you sign the form.

If you're an independent student, report any 529 plans you or your spouse own on question 42. Here's an important detail: distributions from parent-owned 529 plans used for qualified education expenses are not counted as income. That means these withdrawals won't impact your Student Aid Index for future years.

With the FAFSA Simplification Act, the process has become more streamlined. The upcoming 2025-2026 FAFSA form is expected to be available by December 1, 2024.

Grandparent-Owned Plans and FAFSA Rules

Grandparent-owned 529 plans are treated differently. These accounts are not reported as assets on the FAFSA, meaning they won't affect your initial financial aid calculation. And thanks to changes introduced in the 2024-2025 FAFSA Simplification Act, distributions from grandparent-owned 529 plans are no longer considered untaxed student income.

Previously, if a grandparent withdrew $10,000 from a 529 plan, it could reduce the student's need-based aid eligibility by up to $5,000. Now, that same distribution has no impact on FAFSA calculations. This change eliminates a significant roadblock for grandparents who want to help fund their grandchild's education.

As Shannon Vasconcelos, director of college finance at Bright Horizons College Coach, explains:

"When it comes to preparing over 18 years for college payments, the best you can do is to plan based upon the information available to you at the time, but know that there is no guarantee that the rules in effect when you start saving for college will remain in effect when the time comes to pay for college. The more you save, however, the better prepared you will be for whatever shifts in policy and priorities occur."

This update makes it easier for grandparents to contribute without worrying about jeopardizing financial aid eligibility.

CSS Profile Reporting Differences

The CSS Profile, used by many private colleges for awarding institutional aid, has different reporting requirements compared to the FAFSA. This form collects more detailed financial information, which can lead to different outcomes for aid eligibility. Unlike the FAFSA, the CSS Profile may count grandparent-owned 529 plans as assets. Additionally, some colleges may ask about contributions from grandparents or other third parties, which could influence institutional aid decisions.

Jack Wang, Wealth Advisor at Innovative Advisory Group, highlights the distinction:

"A 529 Plan owned by the parents counts as an asset on the FAFSA and CSS Profile. However, if a grandparent or other family member has a 529 and takes a withdrawal for the student, this will be taken into account on the CSS Profile, but not the FAFSA."

The CSS Profile also doesn't use the same Asset Protection Allowance system as the FAFSA, which can result in different financial aid calculations for parent-owned accounts. Policies on how CSS Profile data is used vary by school, so it's crucial to check with each institution you're applying to. As Shannon Vasconcelos notes:

"It is also possible that with the reduction of questions on the FAFSA, more colleges that are interested in collecting information that is no longer available on the FAFSA will begin to require the Profile or their own institutional application."

Understanding these differences is critical, especially for grandparent-owned 529 plans. Some schools may still factor in these distributions when awarding institutional aid, even though the FAFSA does not.

Form	Grandparent 529 Assets	Grandparent 529 Distributions
Old FAFSA Rules	Not reported	Reported as untaxed student income, with 50% factored into the aid calculation
New FAFSA Rules	Not reported	Not reported
CSS Profile	May be considered	May impact institutional aid decisions

Given the varying rules and requirements, it's essential to understand which forms your target colleges use. This knowledge will help you make informed decisions about how to report 529 plans and maximize your education savings while minimizing potential impacts on financial aid.

Ways to Reduce 529 Plan Impact on Financial Aid

Planning wisely can help you make the most of your 529 plan savings while minimizing its effect on financial aid eligibility. The trick lies in understanding how these plans influence the Student Aid Index (SAI) and timing your decisions carefully.

Choosing the Right Ownership Structure

The ownership of a 529 plan plays a big role in how it impacts financial aid. Here's a breakdown of the different ownership options and their effects:

• Parent-owned plans: These are assessed at a much lower rate - 5.64% - on the SAI. For a $50,000 account, only $2,820 is counted. This makes parent-owned plans the most favorable choice for financial aid purposes.
• Student-owned plans: These are assessed at a much higher rate of 20%, meaning $10,000 of a $50,000 account will count toward the SAI. This option is the least advantageous for financial aid.
• Grandparent-owned plans: These aren't reported on the FAFSA at all, which means they don’t count toward the SAI. This can be a smart option for families with grandparents willing to contribute to education savings.

Ownership Type	Asset Assessment Rate	Impact on $50,000 Account
Parent-owned	5.64%	$2,820 counted toward SAI
Student-owned	20%	$10,000 counted toward SAI
Grandparent-owned	0%	$0 counted toward SAI

If grandparents are financially able and interested, it might be worth discussing the possibility of them opening a 529 plan. This approach can be especially helpful in multi-generational college planning.

Timing 529 Plan Withdrawals

When it comes to withdrawals, timing is critical. Always make sure withdrawals align with the calendar year of the related expenses to avoid tax issues.

For parent-owned accounts, spreading withdrawals evenly across all four years of college is often the best strategy. Joseph Orsolini from College Aid Partners emphasizes the importance of budgeting:

"Families need to budget out the four years of college to determine the best course of action with spending savings and borrowing. I have seen a number of families spend down their 529 accounts in the first couple of years but later run out of money and unable to borrow in the final years. These students are left without resources to finish college."

Gretchen Cliburn, a financial planner at Forvis Mazars, suggests using 529 savings first if you know your education costs will exceed your account balance:

"If you know your education costs will exceed your 529 savings, I would recommend spending the 529 balance first before borrowing any money."

For grandparent-owned plans, timing is even more sensitive. Withdrawals made before the final FAFSA is filed can count as student income, which could hurt financial aid eligibility. Ryan Kay from Arena Wealth Management advises:

"If a grandparent is the owner, for example, and they distribute funds from the 529 plan, the money will count as student income for next year's Free Application for Federal Student Aid (FAFSA) and could negatively impact the student's ability to qualify for financial aid. So when the grandparent is the owner, often it's best to leave the money in the 529 plan until the student has filed the final FAFSA (typically the junior year of college; deadlines vary by state and college)."

Maximizing State Tax Benefits and Plan Flexibility

Many states offer income tax deductions for 529 plan contributions, but the rules can differ significantly. Knowing your state’s specific policies can help you save more on taxes while keeping your investment options open.

• In-state plans only: Twenty-four states and Washington D.C. limit tax deductions to in-state plans. If you live in one of these areas, weigh the tax benefits against potentially better investment options in other states.
• Tax parity states: Nine states (including Arizona, Kansas, and Pennsylvania) allow deductions regardless of the plan’s location. This lets you shop around for the best investment options while still claiming your state’s tax deduction.
• No state income tax or no 529 tax benefits: Eight states have no income tax, and five states offer no tax benefits for 529 plans, even in-state. Residents in these states should focus purely on the investment quality of the plan.

529 plans also offer flexibility. You can change investment options twice a year and roll funds into another state’s plan once every 12 months. This allows you to adjust for better investment performance or changes in state tax policies. Additionally, if the original beneficiary doesn’t need the funds (due to scholarships or other reasons), you can transfer the money to another family member without penalties.

State contribution limits vary widely, from $235,000 to over $550,000, giving families plenty of room to save for long-term education costs. Combine these strategies to make your 529 plan work harder for your financial aid and college savings goals.

529 Plan Ownership Structure Comparison

Understanding how 529 plan ownership affects financial aid is essential for making smart college savings decisions. Recent changes, like those introduced in the 2024–25 FAFSA Simplification Act, have significantly increased the appeal of grandparent-owned plans.

Ownership Comparison Table

Here’s a breakdown of how different ownership structures affect financial aid calculations for both the FAFSA and CSS Profile:

Ownership Structure	FAFSA Asset Assessment	FAFSA Distribution Treatment	CSS Profile Treatment	Best For
Parent-owned	5.64% of account value	Not reported as income	May assess at a higher rate	Families seeking a balance between control and aid eligibility
Student-owned	20% of account value	Not reported as income	Evaluated at 20%	Students with few other assets
Grandparent-owned	Not counted as asset	Not reported as income	May count distributions as income	Families prioritizing maximum aid eligibility

This table highlights how ownership impacts financial aid calculations, helping families decide on the most effective structure for their needs.

The FAFSA Simplification Act introduced a game-changing update for grandparent-owned plans. As Alex Hillsberg, a Student Finance & Loan Expert, explains:

"Under the new FAFSA rules, these withdrawals are no longer reported as income, maximizing potential aid awards."

This change has made grandparent-owned plans far more appealing. For example, a $100,000 grandparent-owned plan now contributes $0 to the FAFSA’s SAI (Student Aid Index), compared to the $5,640 added by a parent-owned plan of the same value.

Parent-owned plans remain the most common choice, offering a good mix of control and minimal financial aid impact. For instance, the same $100,000 in a parent-owned plan only increases the SAI by $5,640, compared to $20,000 for a student-owned plan.

Grandparent-owned plans have surged in popularity thanks to the FAFSA changes. These accounts don’t appear on the FAFSA at all, making them ideal for maximizing aid. However, families applying for private school aid through the CSS Profile should note that some schools might still treat distributions as income.

Student-owned plans are typically the least advantageous due to their higher assessment rate. They’re only practical in cases where the student has very few other assets.

Additionally, grandparents can take advantage of the annual gift tax exclusion, which allows them to contribute up to $17,000 per beneficiary (as of 2023) without triggering tax consequences. This makes grandparent-owned plans even more appealing for families receiving substantial contributions.

When deciding on an ownership structure, think about your family’s financial aid goals and who you want to control the funds. If you’re applying to schools that use the CSS Profile, factor in their rules when making your choice.

Key Points for Parents

Balancing Savings and Aid

When it comes to college funding, understanding how savings and aid calculations work can make a big difference. Here's the key: income impacts aid eligibility far more than assets. For example, the SAI calculation assumes that 25% to 35% of a parent's income could go toward college costs, while only 5.64% of parents' assets are considered. This means a $100,000 salary affects aid eligibility much more than a $100,000 balance in a 529 plan.

Starting early and saving consistently is crucial, and you don’t need to worry about saving reducing your aid eligibility. Parent-owned 529 plans strike the right balance for most families, offering tax benefits while having a minimal impact on financial aid calculations. This aligns with earlier discussions about ownership structures and how they affect aid treatment.

If your family has a high income and is unlikely to qualify for need-based aid, focus on strategies like maximizing tax benefits and seeking out merit-based scholarships. You might also want to explore colleges known for offering generous financial aid packages, even for families earning well into six figures.

When it’s time to spend down assets for college, prioritize using student-owned assets first, as they’re assessed at a higher rate (20%) compared to parent-owned assets (5.64%). For contributions from grandparents, it’s better for them to give money to the parents rather than directly to the student, as this keeps the assessment at the lower parent rate. To make these strategies work seamlessly, consider using financial tools to keep everything organized.

Using Tools Like Maybe Finance

Once you’ve established a solid savings strategy, tools like Maybe Finance can help you take your planning to the next level. This platform allows parents to get a clear picture of their financial situation, including 529 plan balances, family income, and other assets that influence aid eligibility.

Maybe Finance connects with over 10,000 financial institutions, giving you the ability to track your 529 plan growth alongside other investments and savings. This all-in-one view helps you make smarter decisions about when to contribute and withdraw funds.

The platform’s budgeting features are especially helpful for managing college expenses over four years. Many families make the mistake of depleting their 529 accounts too quickly in the early years, leaving little for the later years when borrowing options may be limited. With Maybe Finance, you can model different scenarios and ensure your 529 plan aligns with your broader financial goals.

Its AI-driven insights and spending analysis make it easier to coordinate contributions and withdrawals, optimize tax credits, and manage funds from multiple family members. For families juggling multiple 529 plans with different ownership structures, the tool’s multi-account tracking simplifies monitoring the impact on aid eligibility and tax planning. By having all your financial data in one place, you can make better-informed decisions and reduce the stress of college funding.

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