09 May Will this strategy get us more financial aid for college?

Q. I have saved $50,000 in a 529 plan for each of my two kids. One went to undergrad on a full ride and plans on grad school in a year or two. I said I would pay for grad school since I didn’t pay for undergrad. My younger one starts a college that will cost $65,000 a year in the coming year. Does it make sense to use all the 529 money for my youngest first so hopefully they would both get more financial aid when the older one does grad school?
— Dad

A. Congratulations to you and your children.

It’s great that you’ve been able to set money aside for college expenses.

Let’s start with a look at how 529 plans affect financial aid.

A parent-owned 529 will reduce the amount of student aid package by a maximum of 5.64% of the asset’s value, so in this case the reduction of aid will be a maximum of $2,820, said Jim McCarthy, a certified financial planner with Directional Wealth Management in Rockaway.

He said he recommends clients budget out for four years of undergraduate studies using three strategies: spending down the 529 plans and savings, borrowing in the form of student loans and financial aid.

The best strategy depends on your individual circumstance but a combination of these options usually provide the best outcome, he said.

“If you spend down the entire 529, you might get some additional financial aid but you risk not being able to fund the next three years if you aren’t able to cover the tuition with loans,” McCarthy said.

You would also want to take advantage, if you qualify, for the American Opportunity Tax Credit, he said.

“If you spend $4,000 in qualified education expenses you might qualify for a maximum credit of $2,500,” he said. “Note that a tax credit will lower your tax bill dollar for dollar.”

For your child who is going to graduate school it might make more sense if they file their own taxes, McCarthy said.

“Financial aid looks back two years for tax information to see how much aid they can receive and since the plan is to attend in two years, they can use their own tax return to qualify for financial aid,” he said. “This is assuming that the child will make less income then you are currently making which can make the child eligible for greater financial aid.”

So overall, if you spend down the 529s, there might be an increase in financial aid but you run the risk of not being able to fund the remaining years of college expenses, McCarthy said.

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This story was originally published on May 9, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.