Families Turning to Financial Aid Administrators for '529' Advice
Because of their many benefits, Qualified Tuition Programs, or "529 plans," are increasingly popular with families who are saving for their children's postsecondary education. Many families, however, are concerned about 529 plans' impact on students' eligibility to receive federal financial aid for college.
To help financial-aid administrators address families' questions about 529 plans' effect on aid eligibility, USA Funds® offers the following information from the Education Resource Center (ERC):
Created to encourage savings for higher education, 529 plans currently exist or are in development in all 50 states and the District of Columbia. The two types of 529 plans are prepaid-tuition programs and college-savings programs.
College-savings programs
These programs allow a plan participant to deposit money into an account for use toward a beneficiary's college expenses. For financial-aid-eligibility purposes, the value of a college-savings program is an asset of the owner - not the beneficiary - because the owner can change the beneficiary at any time. If the account is in a parent's name, that resource is considered when calculating the parent's financial contribution. If the student holds the account, 35 percent of the account's value is assessed when calculating the student's contribution.
Starting in 2002, the Internal Revenue Service (IRS) no longer considers earnings from college-savings-program withdrawals to be taxable income. The U.S. Department of Education might require the earnings to be reported in the future as untaxed income on the Free Application for Federal Student Aid (FAFSA).
Prepaid-tuition programs
This type of 529 plan gives families or friends the opportunity to purchase credits or certificates at today's tuition rate for a future tuition bill. Contributions from a prepaid-tuition plan are applied to the beneficiary's higher-education expenses and are included as part of a financial-aid package - either by reducing the student's cost of attendance, or by including the distribution amount as a resource and estimated financial assistance.
On the FAFSA, students should not report the investment value of prepaid-tuition programs as an asset of either the holder or the beneficiary. Prepaid-tuition programs do not affect students' eligibility for Pell grants. In consideration for financial-aid eligibility, distributions from these programs are treated in the same manner as outside scholarships.
The ERC recommends that financial-aid administrators refer families to a tax adviser, accountant or the IRS for additional information about 529 plans' tax implications. Another resource, IRS publication 970, "Tax Benefits for Education," is available at www.irs.ustreas.gov/prod/forms_pubs/index.html.
Submitted by: Larry Viterna and Kathy Bixby, USA Funds Services
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