Financial aid prospects might affect your decision about using 529 college savings plans. Investing in a 529 plan may reduce a student’s eligibility for need-based financial aid. Money in a 529 plan usually is considered a parental asset, so about 5 percent-6 percent of the account balance can be considered part of the family’s expected contributions towards college costs each year.
Families who might receive financial aid might use tactics such as prepaying mortgages and buying cash value life insurance. That won’t reduce financial aid.
Any assets in the child’s name (bank accounts, for example) can be used to pay for the first year of college, which might reduce the family’s expected contribution for future years and result in more financial aid.
Families who don’t expect financial aid because they have ample assets and income may prefer investing in 529 plans for the tax advantages. While the federal government offers tax-free investment buildup inside 529 plans as well as tax-free withdrawals for higher education, many states also offer state tax deductions for contributions to these plans.
