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529 Plan Impact on Financial Aid Eligibility

Updated FAFSA Application

The Consolidated Appropriations Act of 2021 enacted changes in the Free Application for Federal Student Aid (FAFSA) to simplify the form. The start date for the 2024/2025 FAFSA will be delayed due to the complexity of simplifying the FAFSA. The 2024/2025 FAFSA saw the number of questions on the FAFSA decreased from 108 to 46, cutting the length of the form by almost two-thirds. Some applicants will need to answer even fewer questions due to intelligent skip logic and better alignment of the form with federal income tax returns. 

How Changes to the FAFSA Affect Grandparent-owned 529 Plans

Certain types of untaxed income, such as cash support and money paid on the student’s behalf, will no longer be reported on the FAFSA. Cash support can occur, for example, when a grandparent gives a gift to their grandchild to help them pay for college or when the family takes a qualified distribution from a grandparent-owned 529 college savings plan.

As previously noted, grandparent-owned 529 accounts are not reported on the FAFSA. In previous years, however, there was a disadvantage to grandparent-owned 529 plans in that distributions from these plans would count as untaxed income to the student on the following year’s FAFSA.

This distribution is no longer the case starting with the 2024/25 school year. Distributions from grandparents 529 accounts and from 529 accounts owned by any other relatives other than the parent filing the FAFSA will no longer need to be reported on the FAFSA as untaxed income for the student. This new reporting rule is great news for grandparents looking to support their grandchildren’s studies, as their 529 withdrawals will no longer impact students’ eligibility for need-based financial aid.

Account Ownership

The value of a 529 plan, owned by a dependent student or a parent (529 plans do not allow joint ownership), is considered a parent asset on the FAFSA. Any parental assets, such as a brokerage account, savings account, and other assets, will reduce a student’s aid package by up to a maximum of 5.64% of the asset’s value.

So, if a parent-owned 529 savings account contains $10,000, the child’s financial aid award could be reduced by as much as $564. Of course, no one wants to lose $564, but the tax-free investment gains earned in the 529 account could likely outweigh this loss.

However, other student-owned assets are not treated as favorably. For example, a custodial account under UGMA/UTMA will be counted as a student asset, reducing the financial aid package by 20% of the asset value. Consequently, in this case, a $10,000 student asset means $2,000 less financial aid.

Assets in a 529 plan owned by a grandparent or other relative are not included on the FAFSA. In the case of divorce, only the parent who provides greater financial support to the student files the FAFSA. If the other parent owns a 529 plan, it is not reported on the FAFSA.

Impact of 529 Plan Earnings

Any interest, dividends, or capital gains generated from a student’s asset reported on their federal income tax return will be counted on the FAFSA. This income will be assessed at 50% when calculating the Student Aid Index (SAI)*.

However, earnings in a 529 plan do not have to be reported on the FAFSA and will have zero effect on financial aid.

529 Plan Withdrawals

Qualified 529 plan withdrawals are not reportable as student income, regardless of who owns the 529 plan account. These withdrawals are considered qualified distributions when used for qualified education expenses, such as tuition and fees, books and supplies, room and board, and other standard education or college expenses.

*Your Student Aid Index (SAI) is a formula-based index number ranging from –1500 to 999999. Where your SAI falls within the SAI range helps your school determine how much financial support you may need. 

A negative SAI indicates you have a higher financial need. For example, if you have an SAI of –1500, you’ll qualify for a maximum Pell Grant award assuming you have not exhausted your lifetime amounts and meet all student eligibility requirements. Learn how the SAI is calculated.

Your SAI is not

• a dollar amount of aid you’ll receive,
• what your family is expected to provide, or
• your final financial aid offer. 

Your SAI is an index number used by financial aid professionals when creating an aid offer. Your SAI is calculated using information that you (and other contributors, if required) provide on the Free Application for Federal Student Aid (FAFSA^®) form.

During your aid process, you will see the following:

• an estimated SAI on the confirmation page of your FAFSA form
• an official SAI within your FAFSA Submission Summary (after your FAFSA form is processed)

This report is provided as a courtesy for informational purposes only. The information has been obtained from sources we believe to be reliable; however, no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.