Parents with more than one child should consider having a separate 529 plan for each child. This has an impact on investment strategy, state income tax benefits, and tax-free distributions.
- 529 plans can only have one beneficiary, which means each 529 plan’s investment strategy is designed based on a single child’s needs and investment time horizon.
- 529 plan gift tax and some state income tax benefits are calculated per beneficiary, rather than per taxpayer. Having separate 529 plans may allow parents to maximize these benefits.
- Tax-free distributions can only be used for one beneficiary at a time. With separate accounts, parents can avoid the need to change beneficiaries (which is allowed but may complicate record-keeping) when paying for a particular child’s expenses.
Will having separate 529 plan accounts affect financial aid eligibility?
Assets held in a student’s 529 plan are considered when determining the student’s financial aid eligibility. Sibling 529 accounts owned by the parent but designated for other children are excluded from the FAFSA asset calculation under the 2024–2025 FAFSA Simplification rules.
Additionally, 529 plans owned by grandparents and third parties, which name the student, are not reported, and their distributions do not count as student income.
To apply for need-based financial aid, students must complete the Free Application for Federal Student Aid (FAFSA). Nearly 200 colleges also require students to complete the CSS Profile in addition to the FAFSA to determine institutional financial aid. A student’s 529 plan assets and their sibling’s 529 plan assets are treated differently on the FAFSA and the CSS Profile.
Parent-owned 529 plans
Under current FAFSA rules, parents report only the 529 plan(s) that name the student completing the FAFSA as beneficiary. Any 529 accounts owned by the parent for other children (siblings) are excluded from the calculation of parental assets. Parent-owned 529 assets for the applicant still must be reported and are assessed at up to 5.64% toward the Student Aid Index.
If parents are divorced or separated, only the parent who files the FAFSA is required to report any 529 plans they own. If the non-FAFSA filing parent owns a separate 529 plan for the student, it is not reported as a parent asset.
These reportable parent-owned assets, including 529 plans for the student, are assessed at up to 5.64% toward the Student Aid Index (SAI), which is the formula FAFSA uses to estimate a family’s ability to pay for college.
Students who attend a college that requires the CSS Profile must report all 529 plan assets that list the student as a beneficiary, regardless of who the 529 plan account owner is. Parent assets are counted at a maximum of 5% on the CSS Profile, after certain allowances are applied.
Custodial 529 plans
A custodial 529 plan account is a 529 plan account that is owned by a beneficiary who is a minor. Since a minor cannot legally own assets, an adult custodian acts on behalf of the minor and manages the 529 plan funds until the beneficiary reaches legal age. In most cases, the custodian may not change the 529 plan beneficiary.
Assets in a custodial 529 plan account owned by a dependent student are reported as parent assets on the student’s FAFSA.
Generally, custodial 529 plans owned by a student’s sibling are not reported on the student’s FAFSA, since the account is not owned by the student or their parent on the student’s behalf.
The CSS Profile does not require reporting 529 plans owned by a sibling for their future education, but it does require reporting any 529 accounts that name the student applicant as beneficiary, regardless of who owns them.
529 plans owned by a grandparent or other third party
A sibling’s 529 plan, owned by a grandparent or someone other than the parent, such as an aunt, uncle, or godparent, does not have to be reported on the FAFSA. Grandparent-owned 529 plans are also not reported on the beneficiary’s FAFSA.
Students who complete the CSS Profile must report all 529 plans that name the student as a beneficiary, including 529 plans owned by a grandparent.
SAI when there is more than one child in the family
Before the 2024-2025 FAFSA, a family that had more than one child in college could be eligible for more financial aid than a family with a single child in college. However, under the simplified FAFSA rules, this is no longer the case. The new rules do not divide the SAI by the number of children in college simultaneously, which yields a higher SAI for many families.
However, the Income Protection Allowance (IPA) is being increased and will no longer be reduced when more than one child is enrolled in college simultaneously. This will shelter more parents’ income from the need analysis.
The CSS Profile reduces the parent contribution portion of the SAI. Many colleges using the CSS Profile reduce the parent contribution by 40% when a family has two children in college, 55% when there are three children in college, and 65% if a family has four or more children in college.
Thus, if the parent contribution is $100,000, each child would have an SAI of $60,000 on the CSS Profile if there are two children in college simultaneously, and $35,000 if there are four children in college simultaneously.
