How Does a 529 Plan Affect Financial Aid?


How Does a 529 Plan Affect Financial Aid?


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A 529 plan is a powerful financial tool that can help families plan for and attain future education goals for their loved ones. According to a recent Sallie Mae study, about 33% of American families who are saving for college use a 529 plan. That’s 16.25 million 529 accounts as of June 2023 according to College Savings Plans Network. However, some families hesitate to open a 529 because of a common misconception — that it may impact a student’s ability to get federal financial aid.

What is a 529 Savings Plan?

A 529 plan with The Education Plan® offers a range of benefits, including tax-free withdrawals for qualified educational expenses, investment flexibility, and full control of the account. These tax-advantaged plans enable parents and others to save for a loved one’s future education needs. 529 plans offer several investment options to choose from, and the value of your deposits will go up or down based on the market’s performance. The earnings in the account grow tax-free, and withdrawals for qualified education expenses are also tax-free.

What Do 529 Plans Cover?

A U.S. citizen with a valid Taxpayer Identification Number (TIN) or a Social Security number can open a 529 savings account. Often, parents open a 529 for their children. However, grandparents, relatives, and friends can also open and contribute to a 529 plan.

Here’s what a 529 account can be used to pay for:

  • Tuition and fees
  • Room and board
  • Supplies and equipment
  • Computer technology and internet access
  • Apprenticeship expenses
  • Books
  • K-12 tuition of up to $10,000 a year
  • Up to $10,000 for student loan repayment

Does a 529 Plan Affect Financial Aid?

If you have a 529 plan, it will not have a major impact on your child’s eligibility to receive federal financial aid.

Here’s how it works:

  • The government considers funds deposited in a 529 account as the account holder’s assets. If you open a 529 plan for your child, you'll be the owner of the plan and your child will be the beneficiary.
  • Most colleges use the Free Application for Federal Student Aid (FAFSA) form to determine a student’s eligibility for federal financial aid. The information you provide in the form will be used to calculate your expected family contribution (EFC). Your EFC reflects the amount that your family is expected to contribute towards your child’s college education. This also impacts how much financial aid your child may receive.

After you fill out the FAFSA form, the impact a 529 plan will have on your child’s eligibility for financial aid will depend on “who owns the account.

Owned by Parents

For parents, EFC is calculated at the most favorable rate — a maximum of 5.64%. Let’s look at an example. Let’s say you have $30,000 saved for your child in a 529 plan. The 529 plan will only increase your EFC by $1,692, which is 5.64% of the total amount in the 529 plan. Moreover, 529 account distributions aren’t considered student income and, therefore, are not taxable.

Owned by Students

If the student is the account owner of the 529 plan, the funds in the account would be treated as their own assets, and the EFC would be calculated at 20% of the account’s value.

Let’s look at the same example from above. If a student-owned 529 account has $30,000 in it, the student’s EFC would be $6,000, or 20% of the account total. This higher EFC value would lower the student’s eligibility for federal financial aid more than if the account were owned by the parent. This is because students are usually expected to make a larger contribution towards their own education.

Owned by Grandparents, Relatives or Friends

With the implementation of the FAFSA Simplification Act in the 2024-25 academic year, 529 plans owned by friends, relatives, and grandparents will not be considered student assets. Thus, withdrawals from these accounts will not count as student income.

Before the FAFSA Simplification Act, students needed to report any withdrawals from non-parent-owned 529 accounts while filling out FAFSA forms. Such funds were considered unearned income, with FAFSA counting 50% of the income as EFC.

With the new rules in place, grandparents, friends, and other relatives who are willing to contribute to the education of a loved one can open a 529 plan without worrying about hurting the child’s eligibility for financial aid.

What are the Benefits of 529 Plans?

529 plans offer a wide range of benefits, which make them a worthwhile investment.

Long-Term Growth Potential

A 529 plan with The Education Plan enables you to invest your deposits in assets like exchange-traded funds (ETFs) and mutual funds. You can also elect to align the earnings horizon with your goals for saving. In the long term, your average annual return from these securities can be significantly higher than depositing your money in a savings account.

Tax-Free Withdrawals and Earnings

Withdrawals from a 529 account are not subject to federal taxes when you use the funds for qualified educational expenses. Some states also offer deductions on state income taxes for 529 contributions. In New Mexico, for example, contributions to a 529 account with The Education Plan are deductible from the taxpayer’s New Mexico state taxable income each year.

Additionally, the earnings from your deposits grow tax-free, making a 529 a smart long-term investment option.

How The Education Plan Can Help You?

Overall, the benefits of a 529 plan greatly outweigh the small impact a parent-owned plan may have on a student’s potential financial aid. 529 plans are an excellent tax-advantaged way to help a child you love attain their future educational goals. Ready to start saving with a 529 plan? You can sign up for an account with The Education Plan in about 15 minutes.


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For more information about The Education Plan, call 1.877.337.5268 or view the Plan Description and Participation Agreement, which includes investment objectives, risks, charges, expenses, and other important information; read and consider it carefully before investing.

Please Note: Before you invest, consider whether your or the beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in that state’s qualified tuition program. You also should consult a financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plan’s features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.

The Education Plan is administered by The Education Trust Board of New Mexico. Ascensus College Savings Recordkeeping Services, LLC, the Program Manager, and its affiliates, have overall responsibility for the day-today operations, including investment advisory, recordkeeping and administrative services. The Education Plan’s portfolios invest in: (i) mutual funds; (ii) exchange traded funds; and/or (iii) a funding agreement issued by New York Life. Investments in The Education Plan are not insured by the FDIC. Units of the portfolios are municipal securities and the value of units will vary with market conditions.

Investment returns will vary depending upon the performance of the portfolios you choose. You could lose all or a portion of your money by investing in The Education Plan depending on market conditions. Account owners assume all investment risks as well as responsibility for any federal and state tax consequences.

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