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EFFECT OF
SECTION 529 PLANS ON NEED-BASED STUDENT FINANCIAL AID
 | Saving for higher education through a Section 529 Plan
will likely have some effect on a student's eligibility for, and the amount of, need-based financial aid. The
degree to which this occurs will depend on the particular family's financial resources. |
| The federal need analysis system
defines a student's financial need for federal student aid programs, other than
Pell Grants, to be a school's "Cost of Attendance," which includes tuition and
fees, room and board, books and incidentals, and travel and personal expenses
(referred to as "COA") reduced by the student's "Expected Family Contribution"
(referred to as "EFC") plus other estimated financial assistance.
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A statutory formula determines the EFC based on data submitted by the student
to the U.S. Department of Education (the "Department") on the Free Application
for Federal Student Aid (referred to as "FAFSA").
| With regard to a Section 529 Education Savings Plan,
because the account owner can change the
beneficiary or close the account at will, the Department has always treated this type
of Section 529 Plan as an asset of the parent rather than of the student. |
Since
the Department's formula counts a maximum of only 5.6% of the Education Savings
Plan account's value toward the EFC, this treatment is more favorable than if the
account were considered the student's own asset, in which case a maximum of 35%
of the account's value would count toward the EFC.
| As of July 2006 funds in a Prepaid Tuition Plan
are also treated as an asset of the parent rather than of the student. |
| For a student who is a beneficiary of
either type of Section 529 Plan account that has been established
by someone other than his or her parents, the value of the account does not have
to be reported
at all on the FAFSA, and thus will not automatically raise the EFC. |
| The Department's formula applies the same share (50%) of the student's
taxable income toward the EFC whether he or she is the beneficiary of either
type of Prepaid Tuition Plan or of an Education Savings Plan. |
As of July 2006,
qualified distributions from either type of Section 529 Plan are not treated as
income for purposes of computing financial aid.
NOTE: Some private post-secondary institutions use other methods for
determining student eligibility for non-federal student aid. These alternatives
to the Department's formula may treat one or all types of Section 529 Plans
differently when calculating student need. Although some private post-secondary
schools attempt to avoid penalizing students for having such accounts available
to them, many colleges are moving in the opposite direction, and are making sure
that their aid formulas count Section 529 Plan accounts as resources available
to the student-beneficiary.
In addition, most states will include balances in
Section 529 Plan accounts when determining state financial aid for students.
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