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Will Having a 529 Plan for My Child Impact His/Her Eligibility For Financial Aid in the Future?

Understanding 529 Plans

A 529 plan is a tax-advantaged savings plan designed to support educational expenses, spanning the gamut from kindergarten to post-graduate studies. The versatility of 529 plans, sometimes referred to as Qualified Tuition Programs or Section 529 plans, extends to two major types: education savings plans and prepaid tuition plans.

Education savings plans grow on a tax-deferred basis, and the withdrawals remain tax-free, provided they're used for qualified education expenses. Conversely, prepaid tuition plans allow account owners to pay current tuition rates for future attendance at designated educational institutions, effectively locking in a lower cost of attendance.

In recent years, the applicability of 529 plans has expanded. Besides covering K-12 and apprenticeship program costs, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and its subsequent upgrade, SECURE 2.0 of 2022, now enable 529 plans to be used for student loan repayment and funding a Roth IRA. Starting January 1, 2024, up to $35,000 of unspent funds in a 529 account, provided it's at least 15 years old, can be transferred to a Roth IRA.

The Relationship Between 529 Plans and Financial Aid

Despite the evident benefits of 529 plans, one crucial consideration for parents is the potential impact of a 529 plan on their child's future eligibility for financial aid. This is because 529 plans, like other assets, are factored into financial aid calculations.

When a parent owns the 529 account, the financial aid office typically considers 5.64% of the account's value (along with all other non-retirement investment accounts) when determining a student's financial aid eligibility. For instance, suppose a student would typically receive $5,000 in aid for one semester. In that case, if the parents have a $50,000 529 plan, the financial aid benefit could potentially shrink by 5.64% of the $50,000, reducing the student's aid for that semester to approximately $2,180.

If the 529 plan is owned by a non-parent family member, such as grandparents, the situation changes. The financial aid eligibility for the following year can be reduced by up to 50% after the income from the 529 plan is reported. Therefore, the timing and ownership structure of the 529 plan disbursements play a significant role in determining the impact on financial aid.

The Pros and Cons of 529 Plans in Financial Aid Eligibility

Despite these considerations, 529 plans remain a beneficial way of saving for a child's education. They offer significant tax advantages and provide a dedicated means of building a college fund. The impact on financial aid, while important, is often outweighed by the benefits these plans provide.

Moreover, it's worth noting that individual educational institutions may have their own guidelines when it comes to 529 plans and financial aid eligibility. Consequently, some families might consider other saving vehicles, such as the cash value of life insurance, which aren't included in the FAFSA assessment.

Planning for the Future with 529 Plans

While there are no annual limits on contributions to a 529 account, states do cap the total amount that can be contributed. These caps can range from $235,000 to over $525,000. Moreover, while you aren't restricted to investing in your own state's 529 plan, doing so could afford you a tax break.

While a 529 plan may impact your child's eligibility for financial aid in the future, it remains a powerful tool for parents looking to secure their child's educational future. Thorough planning, alongside regular consultation with a financial advisor, can help to minimize any potential impact on financial aid, ensuring your child can benefit from both the savings in the 529 plan and any available financial aid. The key lies in understanding the implications, planning wisely, and exploring all available options.


It will be factored in when considering financial aid eligibility. Unfortunately, having a 529 Plan may affect your child’s eligibility for financial aid in the future.

If a parent owns the account, in 2016 the financial aid office will take 5.64% of the account’s value (and all other non-retirement investment accounts) into consideration when determining how much financial aid a student can receive.

So if the student would have gotten $5,000 in aid one semester, but the parents have a 529 plan with $50,000 in it, the benefit has now been shrunk by 5.64% of $50,000, and the student will receive about $2,180 in aid that semester.

If the 529 is instead owned by grandparents or another non-parent family member, eligibility is reduced by up to 50% of the aid received for the next year, after the income from the 529 has been reported.

Educational institutions may have their own restrictions as well. For this reason, some people seek to save for college in other vehicles that are not included in the FAFSA assessment, such as cash value of life insurance.

What is the Federal Supplemental Education Opportunity Grant?
What is a Student Loan?

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