Hanmin Kim, Margaret Giles of Morning Star
While the 529 university savings plan could be a powerful tool when saving future education costs, as investments in the plan can increase tax-free, many savers haven’t made the most of all the benefits the 529 plan offers.
One common deterrent for investing through the 529 plan is concerns that assets in the 529 account will reduce financial aid eligibility. It is true that 529 assets will affect financial aid, but the effect is likely to be smaller than you think.
Will the 529 plan affect financial aid?
The short answer is yes. An increase in the means of funding higher education naturally means that beneficiaries are eligible for less needs-based aid.
However, 529 plan assets have less impact on the financial aid package than revenue. Student federal financial aid is based on an estimate of what families can contribute annually from income and assets. Income is the largest part of this measure of a student’s ability to pay a university, expressed as the Student Aid Index (SAI) for Federal Student Aid or FAFSA free application. SAI replaced the expected family contributions previously used in applications.
Typically, SAI calculations show parents expect to use 25% to 35% of their adjusted available income to cover university costs, but that number could reach 47%. Parent contributions from assets, including account balances of 529, are valued at a much lower maximum of 5.64%. So if a family has a $10,000 account of 529, this will increase the expected family contributions at up to $564, reducing the federal aid package by the same amount.
The impact of the 529 plan depends on who owns the account
The impact of 529 assets on a beneficiary financial aid package depends on who owns the account. As outlined above, if the plan is owned by the beneficiary’s parent, 5.64% of the account’s value is considered in SAI.
On the other hand, if the plan is owned by a student, up to 20% of the account value may be considered when calculating financial aid eligibility.
As part of the FAFSA Simplification Act, effective during the 2024-25 academic year, due to changes in federal student aid calculations, 529 accounts owned by grandparents or other relatives will not be considered student assets and will not affect the financial aid of the beneficiaries.
Siblings 529 assets are not counted for federal financial aid
After the FAFSA simplification method, assets in 529 accounts are counted as parent assets only with the account beneficiaries. This means that if 529 accounts are set up for other children, the assets in those accounts will no longer count towards expected family contributions. As mentioned above, accounts owned by grandparents and other relatives are also excluded from determining federal financial aid eligibility.
Financial aid eligibility varies between FAFSA and CSS profiles
There are also schools that use university scholarship services or CSS, profiles (mainly private schools) to calculate financial aid packages. The CSS profile formula that calculates the AID is different from FAFSA. For example, a CSS profile requires all 529 accounts owned by the parents of the beneficiaries, while FAFSA only counts 529 accounts whose students are beneficiaries. Furthermore, CSS profiles are customized by the institution, so each school has its own formula to calculate the aid package. Each school using CSS profile information applies its own criteria, but this calculator estimates what your family expects to pay.
This article was provided to the Associated Press by Morningstar. For more personal financial content, visit https://www.morningstar.com/personal-finance
Original issue: April 28, 2025, 12:50pm EDT
