Does a 529 Plan Affect Financial Aid?

Key facts

  • The impact of 529 plans on financial aid varies depending on whether your student qualifies as a dependent for tax purposes.
  • If your student wins a scholarship that meets certain federal requirements, you will not pay a tax penalty on the 529 funds that are returned to you but you may be responsible for taxes on earnings.
  • If there are funds remaining in your 529 plan, you can change the beneficiary to another eligible family member so she may use funds on qualified expenses at eligible institutions.

Saving for college keeps many parents up at night. How much is enough, and will they be able to afford their children’s dream schools? The bottom line is that it is never too early to start putting money aside, and opening a 529 plan is a popular way to grow your savings in a tax-advantaged account.

However, families may be concerned with how a 529 plan may affect their child’s eligibility at financial aid in the future. This quick guide will provide details on this question.

529 Plan Rules: The Basics

Each state offers its own version of the 529 plan, and there can be dramatic differences in incentives, state tax treatment of earnings, plan fees, and investment options available. Regardless of where you live, you can typically invest in any state’s 529 plan. The earnings on your account and any distributions you take do not incur federal taxes, as long as funds are used for qualified expenses at eligible institutions. There are no restrictions on public versus private schools, and your student can attend the college or university of her choice nationwide and even some abroad, as long as the institution meets eligibility criteria.

The Impact of a 529 on Financial Aid

The formula for federal financial aid is complex, and many factors go into determining how much your child will qualify for in grants and federal education loans. For the purposes of calculating federal financial aid eligibility, 529 accounts are considered assets, which may reduce the total amount of financial aid that is awarded.

The exact impact of your 529 account on your student’s financial aid application will vary, but as a general rule, the federal financial aid program requires students to put a percentage of their assets towards their own education. Parents are also expected to put a percentage of assets towards their children’s education. However, the calculation applied to parents’ assets is lower than the amount required of students.

There are two factors that determine whether 529 accounts are considered the parent’s asset or the student’s asset for financial aid purposes. First, the financial aid application determines whether the student is dependent or not. Second, the application looks at whether the student or the parent owns the account. For the purposes of financial aid, parents’ assets are not considered in the calculation for independent students.

Is Student a Dependent? Account Ownership Account Beneficiary Is 529 Parent or Student Asset? Impact on Financial Aid
Dependent Parent Student Parent Lower Impact
Dependent Student Student Parent Lower Impact
Not dependent Parent Student Parent Not Considered
Not dependent Student Student Student Higher Impact
Source: FAFSA and

Financial aid offered by states and specific schools may not necessarily follow federal eligibility guidelines, so the impact of your 529 plan on those figures will vary depending on the state- and school-specific requirements.

Note that your child might be the beneficiary of 529 accounts opened by other family members or friends. These accounts are not included as student or parent assets in financial aid calculations. However, withdrawals that benefit the student may be included in the student’s income. Since the following year’s financial aid is based in part on the student’s income this year, there is a possibility that future financial aid awards will be reduced.

Making the Most of Your 529: Scholarship Winners

Some students may also receive scholarships that pay for some or all of their education expenses. In this situation, you may be left with unused funds in your 529 account. If the scholarship meets certain qualifications as defined by federal law, you can avoid the 10% tax penalty that is usually assessed on 529 withdrawals for non-qualified withdrawals.

However, in this situation, it is likely that you will be responsible for income taxes on earnings that would otherwise have been exempt from federal taxes. Students can put the remaining 529 funds towards qualified education expenses at eligible institutions that are not covered by the scholarship, such as housing, meals, and books, to maintain the tax advantages of withdrawals. In addition, since beneficiaries can be changed on a 529 account, account owners can also designate the beneficiary to be another eligible family member.

Bear in mind that financial aid eligibility formulas and the impact of various assets on financial aid awards can change at any time. Check with your financial aid specialist to better understand the details that apply to your situation.


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This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.

For information on any 529 college savings plan contact the plan provider for details on the investment objectives, risks, charges, expenses, and other important information included in the Plan Description and Participation Agreement; read and consider it carefully before investing.

Please Note: Before investing in any 529 plan, you should consider whether you or the beneficiary’s home state offers a 529 plan that provides its taxpayers with favorable state tax and other benefits that are only available through investment in the home state’s 529 plan. You also should consult your financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plans’ features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.

Earnings on nonqualified withdrawals are subject to federal income tax and may be subject to a 10 percent federal tax penalty, as well as state and local income taxes. The availability of tax and other benefits may be contingent on meeting other requirements.