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You contributed to your Ohio’s 529 Plan account for years, starting early to take advantage of the CollegeAdvantage 529 tax benefits as well as the power of compound interest. Now, your child is now finishing high school and wants to continue their education, whether at an accredited two-year, four-year, graduate or professional, or any other post-secondary schools that accepts federal financial aid.
Your next step is to submit the Free Application of Federal Student Aid (FASFA) to see if your child qualifies for federal student aid. As you’re reporting your 529 plan as an asset on FASFA, you wonder, “Are all my years of saving for college going to negatively affect our chances of receiving financial aid?” The answer is, “No”, according to a recent study by the Center for Social Development at Washington University in St. Louis. Here’s why.
Federal and state financial aid
Federal student aid is available in a variety of forms, typically offered in the form of grants, loans or work-study. With Pell Grants, this aid given to a student will not have to be repaid. Federally subsidized student loans and parental loans must be repaid after college with interest by either the student or you. Work-study programs allow enrolled students to work part-time to earn money for some college costs. Make sure you understand what type of aid is being offered to see whether or not you will have to repay it with accrued interest.
Other organizations — like states, universities, colleges, and private organizations —also use the FAFSA to determine what institutional grants or loans to offer to students interested in attending their school.
Expected Family Contribution (EFC)
You will need to submit what your incomes and assets are as well as your student’s assets and income on the FAFSA. This information is added to a formula to determine your Expected Family Contribution (EFC). The EFC represents what a family can expect to cover for higher education expenses. The difference between the total cost of enrollment and the EFC represents the remaining amount that may subsidized through federal student aid, based on need.
Income and assets are the largest component of the EFC formula. There are income allowances for basic living expenses, taxes, and family size; this equation will weigh parental income on a sliding scale of 22 - 47%. Students’ income will be assessed at 50%, except for two exclusions found in the simplified EFC formula and automatic zero EFC. The next part of the EFC formula is assets. There are many exclusions and allowances in this part of the equation.
Simplified EFC formula
If you and your spouse make less than $50,00 in adjusted gross income and also 1) have received federal public assistance in the previous two years; or 2) have filed a1040a or 1040EZ; or 3) are considered a dislocated worker, then your child qualifies for the simplified EFC formula. With this equation, your and student’s assets are not used to formulate the EFC.
Automatic zero EFC
If you and your spouse’s income is under $25,000, then your child is qualified for the automatic zero EFC. This sets your family’s income contribution in the EFC formula to zero, and as well as the assets. Your child’s assets also will not be included in determining the EFC.
With these two provisions, the students who need the most need-based financial aid will not have their parents’ income and assets, as well as their own, counted in their EFC. This increases their monetary assistance funding.
Additional EFC exclusions
For families who don’t qualify for the simplified EFC or automatic zero EFC formulas, there are additional EFC exclusions for savings that are held in qualified retirement assets, such as 401(k)s and IRAs; home equity; family businesses; and insurance annuities.
Allowances for college savings and asset protection
Lastly, if you have been setting aside asset protection reserves, like an emergency fund, and savings for your children’s college educations— in 529 plans and other savings vehicles, there’s an allowance up to certain level of savings. This allowance will increase as your age increase.
All the exclusions and allowances greatly reduce the impact that parental assets have on receiving financial aid.
If there are any assets you own that are not listed in these provisions, only a small percentage of it will be included in the EFC. The assets can calculated up to the maximum of 5.64% of its value. For lower-income families, this percentage rate will be lower.
Center for Social Development’s study shows that with the simplified EFC and automatic zero EFC formulas and the additional exclusions for certain parent-owned assets, then the low- and moderate-income families who need federal and state financial aid will not penalized for taking steps to save for college expenses.
Saving for college is a forward-thinking action plan. Your 529 plan has a minimal effect on federal and state financial aid. There are additional tax benefits for saving in a 529 account for your child’s future college costs. With investing in a 529 college savings plan, all of the money you contribute will grow tax-free and you can withdraw all earnings tax-free, provided that the account is used for qualified higher education expenses. When investing in Ohio’s 529 Plan, residents of Ohio receive an additional tax advantage of deducting their 529 plan contributions to CollegeAdvantage from their taxable state income in any amount up to $4,000 per year, per beneficiary, with unlimited carry forward. This means that $4,000 per year is not a contribution cap. Should you choose to contribute more than $4,000 in a calendar year, any amounts above $4,000 may be deducted in future years, in increments up to $4,000 per year, until all contributions have been deducted.
If you have a 529 account, keep on saving. The funds you’re investing today to cover their future college costs is an investment in your child. And remember, your 529 plan will have a minimal effect on their chances of receiving need-based federal financial aid.
If you haven’t started saving in 529 account, Ohio’s 529 Plan offers calculators and tools to build a 529 plan that best fits you and your beneficiary’s needs. CollegeAdvantage also provides 529 account strategies designated by life stages. The CollegeAdvantage Direct Plan offers a variety of investment options including ready-made, age-based or ready-made, risk-based portfolios.
Open a CollegeAdvantage 529 plan to save for your child’s future training and education. 529 accounts are an excellent alternative to student loan debt. CollegeAdvantage is your plan, your way.
Posted on April 9, 2018