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Jim Lange: Is putting money in a 529 plan going to hurt any of their chances of receiving financial aid?
Joe Hurley: Well, the financial aid rules are kind of funny. I mean, they’re difficult to get a handle on in many cases. 529 plans that are owned by a parent, or even by the student directly, have very little impact on financial aid. They’re treated as an asset of the parent. They’re assessed in the formula that computes the expected family contribution at a low rate of 5.6 percent, as opposed to, let’s say, a custodial account for the child which is assessed at a 20 percent rate, and any distributions that come from the 529 plan are not counted as income in that financial-aid formula.
For grandparents, it’s a little bit different. If the grandparent owns the 529 account, then the asset value does not get reported on the financial aid application at all. So instead of 5.6 percent, it’s zero percent of the value affecting the student’s financial aid.
The potential problem, though, is that if a grandparent takes distributions from a 529 plan, on the following year’s financial aid application, that distribution has to be added to the student’s income, and it gets reported on the financial aid application, and that income can have a negative impact on eligibility. So, some grandparents actually prefer to make contributions to a 529 account that’s owned by the parent rather than themselves just to get better financial aid treatment, and I know I’ve made it sound complicated and that’s because it is complicated, and you might have to push the pencil a little bit about doing that.