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Does a 529 Plan Impact Financial Aid?
By
Gabriel Jimenez-Ekman
Gabriel Jimenez-Ekman is a content editor and writer at Scholarships360. He has managed communications and written content for a diverse array of organizations, including a farmer’s market, a concert venue, a student farm, an environmental NGO, and a PR agency. Gabriel graduated from Kenyon College with a degree in sociology.
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Cece Gilmore is a Content Writer at Scholarships360. Cece earned her undergraduate degree in Journalism and Mass Communications from Arizona State University. While at ASU, she was the education editor as well as a published staff reporter at Downtown Devil. Cece was also the co-host of her own radio show on Blaze Radio ASU.
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Bill Jack has over a decade of experience in college admissions and financial aid. Since 2008, he has worked at Colby College, Wesleyan University, University of Maine at Farmington, and Bates College.
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Maria Geiger is Director of Content at Scholarships360. She is a former online educational technology instructor and adjunct writing instructor. In addition to education reform, Maria’s interests include viewpoint diversity, blended/flipped learning, digital communication, and integrating media/web tools into the curriculum to better facilitate student engagement. Maria earned both a B.A. and an M.A. in English Literature from Monmouth University, an M. Ed. in Education from Monmouth University, and a Virtual Online Teaching Certificate (VOLT) from the University of Pennsylvania.
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529 Plans offer substantial tax breaks and other opportunities for college savings. But no-one wants to be penalized for those assets when it comes time to fill out the FAFSA. If you’re wondering how your 529 Plan will impact FAFSA and other financial aid, you’re not alone. 529 Plans can affect your financial aid results, but there are ways to lessen its impact.
In this article, we’ll go over how 529 Plans impact each of your sources of financial aid. We’ll start with a guide to how 529 Plans impact FAFSA results. We’ll show you how to disperse your funds strategically in order to maximize your aid package. Finally, we’ll go over how 529 Plans may be reported differently on the CSS Profile.
FAFSA
To determine your eligibility for financial aid, the government collects your information via the FAFSA. After you input your financial information, you will receive a Student Aid Index number, or SAI. Your SAI determines your eligibility for a wide variety of aid opportunities. These include the Pell Grant, federal loans, state aid, and more. Many educational institutions make financial aid decisions based on the FAFSA. Additionally, many need-based scholarships use Pell Grant eligibility as a criteria for applicants.
As you can see, your FAFSA results are very important to your financial aid awards. Let’s break down how 529 Plans are reported on the FAFSA. Your reporting requirements will vary based on the ownership and balance of the account.
See also: How to complete the FAFSA (a step-by-step guide)
Account balance
One of the most important factors to consider for 529 Plans held by parents is your account balance. The Asset Protection Allowance used to protect a family’s assets from being considered for the EFC or Expected Family Contribution. However, with the 2024-2025 FAFSA changes the EFC has been replaced with the SAI and the Asset Protection Allowance has dropped to $0.
These changes mean that all reportable assets must be reported to the FAFSA and will be included in the calculation of your SAI.
Read more: How much can you contribute to a 529 Plan?
Account ownership
Account ownership can play a big role in how your 529 Plan factors into your FAFSA. Students and parents who own a 529 Plan must report their plan as an asset. On the other hand, they are not required to report distributions from the plan as income. This means that payments made from their plan will not be penalized.
Plans owned by other family members, such as grandparents, are treated differently. 529 Plans that are held by other family members do not need to be reported as assets. This means that no matter how much money is in the account, it will not affect a student’s aid package. However, withdrawals from the account will be taken into consideration.
Withdrawals from a family member other than a parent must be reported on the FAFSA as untaxed income. This can reduce a student’s aid package by 50% of the contribution. This is a huge penalty, but luckily there are a few ways around it. Here are three ways to avoid the withdrawal penalty for non-immediate family:
- Gradually rollover funds into a parent’s 529 Plan
Your non-immediate family member can periodically rollover portions of their savings into a parent’s plan. Using this method, the student’s parent is the one who makes the withdrawals, so they do not need to be reported. As an added benefit, the parent does not have to report a large asset in their account. If funds are rolled over gradually, the parent should never have an especially large balance. - Wait until the student has submitted their final FAFSA
Instead of helping out with a chunk of tuition every year, your family member can save their funds. Once the student submits their final FAFSA, their family member can contribute their entire savings towards one year. This way, you will never have to report the income on a future FAFSA. Additionally, you’ll never have to report it as an asset. - Grant a parent ownership of the account
Your non-immediate family member can also transfer ownership of the account to a parent. If they exceed the Asset Protection Allowance, you will still have to report the funds as an asset. However, this 5.64% penalty is far less than the 50% penalty paid with untaxed income.
Depending on your financial situation, it may make more sense to combine these methods. A grandparent or aunt may decide to rollover portions of their savings into a parental account each year. Then, come senior year, they can make one large payment of the rest of their savings. They could also transfer ownership of the account once the final FAFSA has been filled out. This would relieve parents from reporting it as an asset.
Related: How much is the 529 Plan tax deduction worth?
Reporting account earnings
Luckily, earnings on a 529 Plan do not need to be reported on the FAFSA. This is an especially important advantage for 529 Plans. Interest or earnings from other savings plans must be reported on a FAFSA which can reduce financial aid by 50% of their value.
CSS Profile
The CSS Profile is an increasingly popular method of collecting information to determine financial aid. It is used to determine aid packages at an institutional level. The CSS Profile collects more detailed information than the FAFSA. As a result, you are more likely to be required to report your 529 on the CSS Profile.
In some cases, the CSS Profile will take a 529 Plan owned by a grandparent into account as an asset. This differs from the FAFSA, which only takes note of it as income to the student. Additionally, the CSS Profile does not use the same Asset Protection Allowance system as the FAFSA.
Related: CSS Profile vs. FAFSA: What you need to know
Takeaways on 529 Plans’ impact on FAFSA
In some situations, your 529 Plan may impact your financial aid. However, even in the worst-case scenario, your aid will only be reduced by a fraction of your savings. If you start saving early, the tax-free growth and lowered penalties make a 529 Plan more than worthwhile. Just remember to time contributions from grandparents strategically to mitigate penalties. And start saving earlier rather than later in order to maximize your tax-free earnings. Good luck!
Next steps: How to choose the best 529 Plan
Additional resources
If you’re a parent looking to plan for your child’s educational future, we can help out. We have guides to help you and your child through every step of the application process. A great place to start is our guide to how much to save for college. Another great way to help finance a college education is to encourage and help your child start applying for scholarships – regardless of their age, we have opportunities for them! That includes middle school scholarships and high school full ride scholarships, as well as our free scholarship search tool for all ages.
And remember – aside from saving money for college, it’s also important to set your student on the right educational path now so that they have the best college options and receive merit-based aid. Our comparison of private vs public schools can help you decide the best fit for their primary education. Once they’re in high school, it’s important to ensure that they are on a good track to create a good impression on admissions officers. Our high school checklist and guides to internships and extracurricular activities can help the two of you plan a productive schedule and use of their time. You can also check out our guide to GPAs to get an idea of what GPA you want to shoot for. Good luck!
