If I had a dollar for every time I’ve been asked this question, I think I’d be able to fully fund my own 529. And, I get it. We want to save, but we don’t want to ruin our chances of getting as much financial aid as humanly possible.
Here’s the lowdown. A 529 will impact your financial aid. But, not nearly as much as you may think. In fact, your 529 plan will end up helping you more than hurting you.
In order for colleges to determine what kind of aid you are eligible for, they’ll require you to fill out the Free Application for Federal Student Aid, better known as the “FAFSA.” Colleges use this information, along with your federal tax return, to calculate your Expected Family Contribution (EFC). A lower EFC means more financial aid eligibility.
In making this determination, the FAFSA considers income and assets from both Parents and Students. Income has a much larger impact on financial aid qualification than assets do. And, the other good news is 529 plans are classified as Parental assets, which are treated favorably compared to Student assets. Specifically, a maximum of 5.64% of Parental assets are counted in the calculation, whereas 20% of Student assets are assessed.
Sure. For example, if Parents have $25,000 in 529 plan, this will increase their EFC by a maximum of only $1,410 ($25,000 x 5.64%). This essentially translates into the assumption that a family can contribute slightly more towards school, therefore slightly less aid is needed. Importantly, unless your household income is less than $50,000, “aid” means loans. And we all know that saving for college, versus borrowing and paying back loans with interest, is the smarter route.
In the end, 529 plans are a great option for saving for college without jeopardizing financial aid, and for making college more affordable in the long run.
This is a simplified explanation as there are many moving parts to the FAFSA calculation. Read more details about how the calculations work and what kind of impact you can expect on your particular situation. CLICK HERE