529 Plan Basics – Part V of V (Financial Aid)

Welcome to Your Money.  In our last of five installments on 529 plans, I’ll discuss financial aid eligibility. 

There have been some recent changes in this area, but, as a general matter, keep in mind that investing in a 529 plan will reduce a student’s eligibility to participate in need based financial aid.  One significant change was the result of the Deficit Reduction Act of 2005.  Previously, benefits from pre-paid tuition plans were not treated as parental assets and typically reduced need-based financial aid on a dollar for dollar basis, while assets held in college savings plans received more favorable financial aid treatment. 

Now, assets held in pre-paid tuition plans and college savings plans are treated similarly for federal financial aid purposes.  Both are treated as parental assets in the calculation of the expected family contribution toward college costs.  This change became effective July 1, 2006. 

In this series on 529 plans, I’ve tried to cover some of the basics of 529 plans, including taxes, fees, and financial aid.  But there’s more homework to be done.  For more information about 529 plans, please read the SEC’s investor guide, An Introduction to 529 Plans.  You can find it on the Investor Information section of sec.gov or simply type “Introduction to 529 plans” into your favorite search engine.  And, of course, read the disclosure statement or program description for any plan you are considering. 

Remember that there are many 529 plans out there, and many alternative options for saving for college. If you use a broker or financial adviser, be sure to ask the reasons why the option he or she recommends is the one best suited to your needs.

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