If you’re using a 529 plan to save for college, you may wonder whether it will hurt your child’s eligibility for financial aid. In most cases, the impact is minimal, and the long-term tax-free growth of a 529 typically helps more than it hurts. The effect depends on who owns the account and which aid form the school uses.
How 529 plans are treated on the FAFSA and CSS Profile
Most colleges use the Free Application for Federal Student Aid (FAFSA) to award need-based aid. FAFSA data is used to calculate a student’s Student Aid Index (SAI), formerly called the Expected Family Contribution (EFC). Fewer than 200 colleges also require the CSS Profile, which can treat assets differently.
Since FAFSA is the most widely used form, the sections below focus on how 529 savings affect FAFSA calculations.
Account ownership
How a 529 plan affects aid depends on who owns the account:
- Parent- or student-owned 529s: Counted as a parent asset on the FAFSA, reducing aid eligibility by up to 5.64% of the account value. For example, a $10,000 balance could reduce aid by $564.
- Student-owned non-529 assets (UGMA/UTMA): Counted as student assets, reducing aid by 20% of the value. A $10,000 account could reduce aid by $2,000.
- Grandparent- or relative-owned 529s: Not reported on the FAFSA at all. In cases of divorce, only the custodial parent’s assets are reported, so a noncustodial parent’s 529 is also not included.
529 savings plans vs. prepaid tuition plans
Both 529 savings plans and prepaid tuition plans are treated the same way on the FAFSA. Whether you’ve been saving in an investment-based 529 or prepaying future tuition, the account is considered a parent asset if the parent is the account owner. That means it’s assessed at up to 5.64% of its value, just like other parent assets.
Impact of 529 plan earnings
Taxable student income reported on a tax return is assessed at 50% when calculating aid. In contrast, investment earnings inside a 529 plan aren’t reported on the FAFSA, so they do not affect eligibility.
529 plan withdrawals
Qualified 529 withdrawals are never counted as student income on the FAFSA, no matter who owns the account, as long as the funds are used for qualified education expenses like tuition, fees, books, room and board.
Grandparent-owned 529s: FAFSA changes
Before 2024–25: Withdrawals from grandparent-owned 529s were counted as untaxed student income on the following year’s FAFSA, which could significantly reduce aid eligibility.
Starting in 2024–25: This penalty is gone. Grandparent (or other relative) 529 withdrawals are no longer reported on the FAFSA. That means grandparents can now help pay for college without impacting need-based aid — a major win for families.
Read this post for a full explanation of changes from the new simplified FAFSA.
Do 529 plans affect merit scholarships?
No. 529 plan balances do not affect eligibility for merit-based scholarships. Merit aid is awarded based on academic, athletic, or other achievements and is not tied to family income or assets. Saving in a 529 has no impact on your child’s chances of receiving merit scholarships.
Estimate your financial aid eligibility here
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