22 Oct What should I do with this 529 plan?

Q. I have saved $70,000 in 529 plans for each of my sons. They are 13 and 16. The funds are invested in age-based investments. The problem is I think the oldest child may get a scholarship and not need the money. Should I move the funds from his account to the younger one before we apply for financial aid, just in case the scholarship doesn’t happen? Or will the savings account against us either way?
— Parent

A. You’re smart to wonder how your assets may count against you when it comes to financial aid formulas. Here’s what you need to know.

The FAFSA – Free Application for Federal Student Aid – requires that assets be reported as of the date the FAFSA is filed, said Charles Pawlik, a certified financial planner and chartered financial analyst with Beacon Trust in Morristown.

The value of all parent-owned 529 plans has to be reported on the FAFSA, regardless of who the beneficiary on the account is, Pawlik said.

“Changing the beneficiary of the 529 plan from your oldest child to your youngest will not make a difference as far needing to report the value of the account on the FAFSA,” he said.

If your older child does receive a scholarship, you still may need the funds in the 529 to pay for his other bills.

“There are other expenses beyond tuition that count as qualified withdrawals that can be taken tax and penalty free, including room and board, books, and required supplies and equipment,” Pawlik said. “The funds in the 529 plan for your oldest child can also be used to pay for qualified education expenses for graduate school.”

Pawlik said financial aid eligibility is based on both the income and assets of the parents and the student.

Parent income and assets generally don’t impact financial aid eligibility as much as the student’s income and assets, he said.

“Parent assets generally get preferential treatment in terms of the percentage of the asset/account that is counted towards the calculation of the Expected Family Contribution (EFC) toward college costs, which in turn impacts the amount of financial aid the child may receive,” he said.

Parent-owned 529 plans are assessed at a rate of up to 5.64 percent of the account on the FAFSA, meaning that up to 5.64 percent of the account is factored in or expected to be contributed towards the cost of college, he said.

Also know an UTMA/UGMA 529 plan owned by a dependent student would also be counted as a parent asset on the FAFSA. This is in contrast to other accounts/assets owned by the child, such as a custodial UGMA/UTMA account, 20 percent of which is generally counted as being available to pay for college.

If you’re applying to schools, we hope you also know about the CSS Profile – another financial aid application used by many private schools. This form considers your assets somewhat differently than the FAFSA.

“For instance, the FAFSA excludes the value of grandparent or third-party owned 529 plans, whereas the CSS Profile requires that the value for all 529 plans with the student listed as a beneficiary be reported,” Pawlik said. “A child-owned 529 plan is also treated more favorably on the FAFSA than on the CSS Profile.”

So if you won’t need the funds in the 529 plan for your older child, you can always change the beneficiary at a later time.

To learn more about financial aid applications, check out these guides to the FAFSA  and the CSS Profile.

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