529s Are Made To Work With Financial Aid

According to the 2019 “How America Pays For College” report by Sallie Mae, 77% of families complete the Free Application for Federal Student Aid (FAFSA) to get access to more than $150 billion in financial aid.

If you are an account owner of an Ohio 529 Plan and are getting ready to fill out FAFSA, you may be wondering if all the years of saving for college are going to have a significant effect on your child’s chances of receiving financial aid? The answer is no and here’s why.

Filling out FAFSA

FAFSA is the application for federal financial aid used to pay for four-year colleges and universities, community colleges, vocational or trade schools, and graduate schools. Federal student aid is available in a variety of forms, usually as grants and scholarships, loans or work-study. Pell Grants and scholarships are federal aid which will not have to be repaid. Federally subsidized student loans and parental loans must be repaid with interest by either the student or the parent/co-signer. Work-study programs allow enrolled students to work part-time through the educational institution 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 or without accrued interest.

States, universities, colleges, and other organizations also use the FAFSA to determine what institutional grants or loans to offer to students interested in attending a particular educational institution.

Expected Family Contribution (EFC)

You will need to submit your income and assets as well as your student’s assets and income on the FAFSA. This information is entered into a formula to determine your Expected Family Contribution (EFC). The EFC represents what a family will be expected to cover for higher education expenses. The difference between the total cost of enrollment and the EFC represents the remaining amount that may be subsidized through federal student aid.

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 assets in a 529 plan are a component in determining the EFC. Current federal guidelines state that if a student is a dependent and the 529 account is owned by a parent, then the account will be considered the parent’s asset and will be calculated at a maximum of 5.64% of its value for the EFC. However, if the student is not a dependent and is the account owner, the 529 plan account will typically be treated as the student’s asset and is generally factored into the EFC at the higher rate of up to 20%. 

There are many exclusions and allowances in this part of the equation. Here are four of them:

  • 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 your 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 above 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.

Therefore, your 529 plan has a minimal effect on federal financial aid.

When a parent-owned 529 plan is tapped to cover a qualified higher education expense for the beneficiary, the amount of the distribution is not considered as income for the student and will not have to be included in next year’s FASFA. Therefore, a qualified distribution from a parent-owned 529 account will not affect a student’s opportunity for financial aid.

Let’s talk for a moment about grandparent-owned 529 plans. It will not be recorded on the FAFSA as part of the student’s income nor as a parental asset. However, once there is a withdrawal from a grandparent-owned account, the monies will have to be listed as the student’s income on the FAFSA for the following year and will be assessed at 50% for the EFC. Therefore, it will have a negative effect on the student’s financial aid eligibility. Federal financial aid calculations are complicated. You should consult a financial aid expert and your tax or financial advisor before setting up or requesting any withdrawal from a grandparent-owned account or any account that is not owned by the dependent’s parent.

There are many tax benefits for saving in a 529 account for your child’s future college costs. While investing in a 529 college savings plan, all of the money you contribute will grow tax-free and withdrawals will be tax-free, for qualified higher education expenses. When investing in Ohio’s 529 Plan, residents of Ohio receive an additional tax advantage of deducting their Ohio 529 plan contributions 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. If you 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 would like to start planning ahead for financial aid, try the FAFSA4caster, a free financial aid calculator that gives you an early estimate of your eligibility for federal student aid.

If you have a 529 account, keep on saving. The funds you’re investing today to cover their future higher education is an investment in your child. And remember, your 529 plan will have a minimal effect on their chances of receiving federal financial aid.

If you haven’t started saving in 529 account, open an Ohio 529 Plan today to save for your child’s future training and education. Ohio’s 529 Plan offers calculators and tools to build a 529 plan that best fits you and your beneficiary’s needs. Someday your child is going to college. Someday starts with Ohio’s 529 Plan.

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