If you’re saving for college, a 529 plan can be a great way to save money on tuition. But how does a 529 plan affect financial aid?
The good news is that 529 plans are generally not considered when determining your eligibility for federal financial aid. This means that you can save as much money as you want in a 529 plan without worrying about it affecting your financial aid award.
However, there are a few exceptions to this rule. If you use 529 plan funds to pay for qualified expenses, such as tuition, fees, books, and room and board, the amount of money you withdraw from the plan will be reported as untaxed income on your tax return. This can reduce your eligibility for certain need-based financial aid programs, such as the Pell Grant.
Here’s a breakdown of how 529 plans can affect different types of financial aid:
- Federal financial aid: 529 plans are generally not considered when determining your eligibility for federal financial aid. However, if you use 529 plan funds to pay for qualified expenses, the amount of money you withdraw from the plan will be reported as untaxed income on your tax return. This can reduce your eligibility for certain need-based financial aid programs, such as the Pell Grant.
- State financial aid: The rules for how 529 plans affect state financial aid vary from state to state. Some states do not consider 529 plans when determining financial aid eligibility, while other states do. If you’re planning to use a 529 plan to save for college, be sure to check with your state’s financial aid office to see how 529 plans will affect your eligibility.
- Institutional financial aid: Some colleges and universities do not consider 529 plans when determining financial aid eligibility. However, other colleges and universities do. If you’re planning to use a 529 plan to save for college, be sure to check with the financial aid office at the college or university you’re interested in to see how 529 plans will affect your eligibility.
How to minimize the impact of a 529 plan on financial aid
If you’re concerned about how a 529 plan will affect your financial aid eligibility, there are a few things you can do to minimize the impact:
- Use 529 plan funds to pay for qualified expenses only. Qualified expenses include tuition, fees, books, and room and board. If you use 529 plan funds to pay for other expenses, such as travel or entertainment, the amount you withdraw from the plan will be reported as taxable income on your tax return. This can reduce your eligibility for certain need-based financial aid programs.
- Withdraw 529 plan funds in the student’s name. When you withdraw 529 plan funds, the money is reported on the student’s tax return. This can help to reduce the impact of 529 plan withdrawals on your financial aid eligibility.
- Consider using a 529 plan in conjunction with other financial aid programs. If you’re eligible for other financial aid programs, such as the Pell Grant or the Federal Work-Study Program, using a 529 plan in conjunction with these programs can help to reduce the overall cost of college.
Conclusion
529 plans can be a great way to save money on college, but it’s important to understand how they can affect financial aid. If you’re concerned about how a 529 plan will affect your financial aid eligibility, be sure to talk to your financial aid office.
