How do so-called 529 plans affect college financial aid? These plans, which now allow tax-free buildup and tax-free withdrawals for higher education, come in two varieties,
Savings plans. These 529 plans will pay more or less, depending on how investments perform.
Prepaid tuition plans. Here, you lock in future tuition by investing in advance.
Savings plans are counted as a parental asset, so they may reduce the amount of aid that’s offered. With prepaid tuition plans, distributions may reduce a student’s needs-based aid.
If you think you will qualify for financial aid, you can use a savings plan for accumulation. Then you can rollover a 529 account to a trusted relative (such as an uncle or a grandmother) before filling out the financial aid forms. Such a rollover is tax-free, under current law, and it will keep the 529 plan from being reported on a financial aid form.
