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Could a 529 Plan Mess Up Your Child’s Financial Aid?
Posted By Miranda Marquit On 06/17/2013 @ 7:20 am In Education | 8 Comments
As you work to save up enough money to send your child to college, one of the tools at your disposal is the 529 plan .
This plan allows you to put money to work on behalf of your child. With a 529, money grows tax-free — as long as it is used for qualified education expenses.
But could the 529 be a little too effective? What happens if the account grows just enough that assets affect eligibility for financial aid? Depending on the situation, the 529 might be good enough to help out, but not quite enough to completely cover the costs. But if there is too much in the account, you could lose some of your ability for the financial aid you need.
According to Travis W. Freeman, Certified Financial Planner and President of Four Seasons Financial Education , the real question is who owns the account. “If a parent owns assets such as cash or stock, these parental assets are assessed at an amount of 5.64% toward aid eligibility,” he explains. “However, if the same cash or stock is owned by the student, it will be assessed at an amount of 20%.”
“In other words,” Freeman continues, “if a parent owns the assets, less will be considered ‘available’ for college, thus increasing the chances of receiving aid. If
possible, a child should not be the owner of any assets that may be meant for college.”
Set up the 529 account  so that you own it, but your child is the beneficiary. And be careful about what assets you transfer into the 529. Assets from your child’s savings account  and other custodial accounts that are moved into a 529 still “count” as theirs, so be aware of that.
Another scenario to watch out for is if neither you nor your child owns the account. “Distributions from a 529 plan may have an impact on Financial aid, especially if the 529 owner is not the college student or the parent,” says Peter Donohoe, Certified Financial Planner and Wealth Manager at PRW Wealth Management . “This most often occurs when a Grandparent opens a 529 for the grandchild.”
“A 529 registered in the name of a Grandparent for the benefit of a grandchild should not show up on the first financial aid application the grandchild completes before attending college,” Donohoe continues. “Once a distribution is made from the 529, the distribution does get included as income to the grandchild on the next financial aid form they complete for the following school year.”
Once the income is considered the grandchild’s, it counts heavily against eligibility for financial aid. Donohoe suggests that the 529 account ownership be changed from the grandparent to the parent in order to avoid this issue. Another possibility, he says, is to “wait until junior year to access the 529 for college expenses. By waiting until after Jan 1 of junior year, you will most likely avoid having the income show on the last FAFSA form  the grandchild completes.”
Freeman and Donohoe agree that a 529 is one of the best ways to save money for college. While the account will affect the asset count no matter what, the best way to cushion the blow to aid, though, is to be aware of how ownership of the account affects aid, and assign ownership in the most advantageous manner.
Image: Alex Guerrero 
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 529 plan: http://www.bargaineering.com/articles/529-funds-schools-included.html
 Four Seasons Financial Education: http://www.financialbootcamp.net
 529 account: http://www.bargaineering.com/articles/529-plans.html
 child’s savings account: http://www.bargaineering.com/articles/kids-money-open-kids-savings-account.html
 PRW Wealth Management: http://www.prwwealthmanagement.com/
 FAFSA form: http://www.bargaineering.com/articles/free-college-money-the-fafsa.html
 Alex Guerrero: http://www.flickr.com/photos/poldavo/513534173/
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