One of the most frequently asked questions we hear at Ohio’s 529 Plan, CollegeAdvantage, is, “What happens to the 529 if my child receives a full ride?” We certainly hope your child does earn that amazing academic or athletic achievement; however, research shows that the odds do not seem to be in their favor.  

According to the National Collegiate Athletic Association (NCAA), only around 2% of high school student-athletes receive some form of athletic scholarship at the Division I or II level. Moreover, even less are full-ride scholarships. Most athletic scholarships only cover a portion of higher education expenses to attend the school. Full-ride merit-based academic scholarships are just as rare as the athletic ones.

However, there is another strategy to consider when it comes to scholarships: Apply for many smaller ones that can add up to cover a large portion of college, vocational, professional, or higher education costs. In fact, Sallie Mae’s 2017 “How America Pays For College” report shows that 35% of higher education costs are now covered by scholarships and grants.

Another smart strategy is to continue to save for future college costs in a 529 plan even if your child excels academically or athletically and could receive a scholarship.

“I strongly urge using Ohio’s 529 Plan, College Advantage, to address the costs associated with education or training that comes after high school. When scholarship or cost-free financial aid expectations fall short, more and more people are resigned to the student loan option to cover educational costs,” says Tim Gorrell, executive director of Ohio’s 529 Plan. “I believe such strategy is backwards; why not save and invest before these costs are presented and have those tax-free resources available instead of taking interest bearing loans and starting a new career strapped with debt?”

To avoid stifling student-loan debt, keep saving in a 529 account and take these steps to look for scholarships.

Scholarship search

A good place to start your scholarship search is with your high school guidance counselor. They have access to information to guide your investigation of available scholarships. If your student has been involved in any sports, academic clubs, academic honors, or has done any volunteer or community service, check with those organizations to see if they offer any scholarships. Your local library might also have reference material to review as well.

Sallie Mae offers a free comprehensive Scholarship Search to help you and your student to research what other sources of financial assistance are available to cover higher education costs. Once you’ve registered on the site, Sallie Mae will send you an email when a scholarship that matches your child’s experiences and interests is added to their database. There are other free scholarship search engines to help in your exploration for higher education awards. U.S. Department of Labor also has a free scholarship search tool.

Start your scholarship search while your child is in their sophomore and junior year. Why? First, it’s an opportunity for your college-bound student to gain the life experiences needed to qualify for scholarships. Second, it’s an opportunity for your college-bound student increase their skills and community involvement to shape them into a better-qualified applicant to interested collegiate admission offices.

Make sure to fill in Free Application for Federal Student Aid (FAFSA), even if you think that your child won’t qualify for any federal financial aid due to your family’s assets. If you have a 529 account for your child, the funds will only be included up to the maximum amount of 5.64% of the total. You may be surprised to see for what federal support your student might qualify. Another reason to fill in FAFSA: Most states, universities, colleges, and private organizations will use FAFSA to determine what financial aid, scholarships, grants, or loans to offer to eligible students.

How to use your 529 with scholarships

While you and your child search for additional scholarships to pay for their higher education, there is good news. If you’ve been saving for your child’s future college costs in a 529 plan, your account is made to work with scholarships. First, make sure that the post-secondary school that has offered your student a scholarship has a federal school code with the U.S. Department of Education. If it does, then your 529 plan will cover qualified expenses there. Here are additional options to use your 529 college savings funds with scholarships.

If the offered scholarship isn’t a full ride, your 529 plan can help to pay for the rest of the costs. Tuition, room and board (if your student is enrolled at least half time academically), mandatory fees, books, supplies, computers and related equipment and services are 529-qualified higher education expenses. Room and board can also include rent for off-campus residency and non-taxable only groceries, provided these costs are equal or less than the room and board allowances at the accredited education institution. If your child wants to live off campus, check with the school to find out the allowance limit; your child’s off-campus residency and non-taxable food costs cannot exceed it. 529-qualified withdrawals are not subject to federal or state income taxes. As the account owner, make sure to retain all documents of your 529 plan expenses and withdrawals. You have the burden of proof for tax purposes.

Let’s say that the offered scholarship does cover all of your student’s higher education expenses, then you can also hold onto the 529 account to use if your child decides to pursue dental, law, medical, or other graduate school options.

You also have the option to transfer the 529 to another beneficiary who is related to your child — including siblings, stepsiblings, parents, stepparents, cousins, grandparents, nieces and nephews — to avoid tax penalties. If you are thinking about continuing your own higher education, you can make yourself the new beneficiary of the college savings account. Also, there are no time limits on when you must use the funds saved in a 529 plan so you can keep saving in it for your grandchildren’s future college costs.

Another alternative is to withdrawal the exact amount of the scholarship from the 529 plan. As a non-qualified withdrawal, the earnings portion of the withdrawal will be subject to federal and state taxes. Usually, a non-qualified withdrawal would also be subject to a 10% federal tax penalty. However, there are three exemptions for 529 plans, with one being for receiving a scholarship.

Everyone’s child has a bright future ahead of them. Scholarships and 529 plans make a great team to help them reach their dreams. Visit Ohio’s 529 Plan online to open an account and start saving for future higher education expenses. Every dollar saved now is a dollar that doesn’t have to be borrowed from a student loan later. Even small amounts can add up to big amounts over time by saving regularly. Ohio's 529 Plan, CollegeAdvantage, is your plan, your way.

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