Fiction: The money I put into a college savings account will hurt my child’s chances of receiving financial aid.
Fact: Funds that a parent puts into a 529 savings plan or Coverdell Education Savings Account that are owned by the parent have a low impact on a student’s financial aid package. When these types of accounts are owned by the parent, only a portion of the balance—up to 5.64 percent—is factored into the student’s Expected Family Contribution on the Free Application for Federal Student Aid (FAFSA). This is a much lower rate than the 20% that is assessed on student-owned assets.
You should be aware, however, that distributions from a grandparent-owned 529 plan will be considered untaxed income to the student, with 50 percent of the distribution included in the FAFSA. So, if grandparents do own a 529 plan for the benefit of the child, they may want to consider reserving those funds for the last two years of college, as the FAFSA uses the prior-prior year’s tax return to complete the income questions.