529 Account Held Against You in Financial Aid?

Recently, a client asked me if I had seen the Wall Street Journal article suggesting that 529 accounts established by a student’s grandparent would count against them during the income assesssment of the financial aid process.  This doubt was disconcerting to the client because she understood that 529 accounts set up by a grandparent were exempt.

I haven’t seen the WSJ article, but I am intimately familiar with the scenarios.  I developed her daughter’s college with this understanding and my client did make the right financial decision.  What she needed cleared up was a distinction between the income and asset sides of the financial aid formulas, as well as how the various financial aid applications differ in their requirements.

Since schools vary on their treatment of  finances,  it points to the importance of not making financial decisions isolated from the college exploration process. Some financial strategies may only work with certain schools.   Understanding the dynamics of the academic and social fit is critical to finding the optimal match for the sudent and your realistic budget. It can otherwise be heart-wrenching to say no to your child, after you allowed her to fall in love with a school that you believed you could afford. It is equally important to seek advice from someone who not only understands aid formulas and the college match, but also, one who communicates well with teenagers, and is experienced in “brokering” these conversations between parents and their student.

Here is my response to the client, who reacted to what she heard “on the street”.  My advice? Be careful of the noise out there.

The bottom line is that 529 accounts started only by parents are assets of the parent, and their distributions do not count as income in Federal (FAFSA app) aid formulas.  However, 529s owned by grandparents, while exempt as an asset on the FAFSA, their distributions are seen as income.  Usually the treatment of 529 plan distributions as income will have a much more severe impact on aid eligibility than the treatment of 529 plans as assets. The way around this is to defer on using the 529 until after the students last aid app is completed (spring of college junior year) and used to pay down student loan debt.  The key is that aid formaulas look at income from the prior tax year.  If the Grandparent owned 529 isnt cashed in until after that prior tax year, it isn’t counted.

It also depends on if the school uses the FAFSA alone, or also the CSS Profile aid application. Many private schools use the Profile aid application in addition to the FAFSA.  The Profile rules differ but are sometimes dubious. Here is what Profile says:

Directions from Parent asset section:

Include funds held in Section 529 prepaid tuition or college savings plans or Coverdell education savings accounts established for you (the student) and your brothers and sisters.

Keep in mind this is in the parent asset section and doesn’t state anything about “Grandparent”, and many times these are not known by parents at the time of filing aid apps.  Further, you should know that the Grandparent has authority to change the beneficiary of their 529 accounts to your student’s cousin or any other family member.  So what do you do if your student isnt a guaranteed beneficiary?  Do you report it? So it depends on your understaning of what the Grandparent has set aside and how you understand the question.

Directions from Student Asset section:

Assets that are held in Section 529 prepaid tuition or college savings plans or Coverdell savings accounts should be listed as parent assets in PA-120.

Again, nothing stated about Grandparent owned 529s.

Lastly, there is a section on both aid applications that asks for resources for the coming school year that are from any other sources such outside gift or scholarships etc.  However, even if the 529 money is ear-marked for the student, it is not necessarily going to be used for the student in the next year.  At the time of the aid application if the decision to use the 529next year  isnt a guaranteed,  I would advise to not report it here.

Posted by Adam Metsch



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