Will investing in a 529 plan reduce eligibility for college financial aid? When it comes to the financial aid formulas, 529 plans are not as bad as custodial accounts.
In essence, the standard financial aid form determines an estimated family contribution (EFC). If the cost of a particular college exceeds the EFC, some aid may be offered. Generally, 529 plans are treated as parental assets, which are assessed at a much lower rate than student assets. (Individual colleges may have their own policies on how 529 assets are treated.)
Custodial accounts, on the other hand, are treated as student assets, which are expected to be spent for college, thus reducing the need for aid.
Because 529 plans don’t generate current income, any inside buildup won’t affect the aid formulas. What happens, though, when money is withdrawn to pay college bills? Currently, distributions from 529 plans aren’t counted as a student’s income but that may change in the future.
If those distributions must be included, one strategy is to minimize distributions until January of the student’s junior year. After that, no more financial aid forms are to be filled out and the income won’t be counted.
