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Money Management (Distributed by the New Jersey Society of Certified Public Accountants)

Section 529 College Savings Plans
and Their Impact on Financial Aid

Section 529 college savings plans and prepaid tuition plans are effective ways to save for college. But, many parents are concerned about the effect these college savings plans may have on their child's chances to qualify for financial aid. It's difficult to predict how 529 plans will be treated years from now, but here is what the New Jersey Society of Certified Public Accountants (NJSCPA) has to say about the current rules:

A Parent's Asset
According to the U.S. Department of Education, 529 college savings plans are considered an asset of the parent, assuming the parent owns the account, and the child is the beneficiary. That's a big advantage when it comes to need-based financial aid. Depending on whether the 529 savings plan is owned by the student or parent can affect the way the plan is treated as a family asset. If the parents own the account, a maximum of 5.6 percent of the account will be considered in the family's contribution calculation for each academic year. If the student is the plan owner, 35 percent of plan assets will be considered in the calculation. In other words, parents' annual expected contribution toward a child's college costs will include just 5.6 percent or less of the value of a 529 college savings plan, a relatively minor impact.
If grandparents, relatives or family friends open a 529 college savings plan and name the student as the beneficiary, under current rules, the money isn't likely to have any effect in determining federal financial aid for that student. The assets would be viewed as belonging to the individual who opened the account.
The U.S. Department of Education also reports that withdrawals from 529 college savings plans used to pay for qualified college expenses do not have to be included in family income on the student's federal financial aid application. Thus, distributions from a 529 plan in one year will not impact a student's financial aid eligibility for the following year.

Section 529 Plans and Private Schools
Private schools, responsible for much of the aid students receive, generally treat 529 accounts differently than the federal government, public colleges and universities. Private schools typically use the CSS Financial Aid Profile, a more comprehensive formula for examining available financial resources. Unlike the Free Application for Federal Financial Aid (FAFSA), the CSS Profile requires the disclosure of all 529 plans naming the student as a beneficiary, regardless of the plan's owner.

529 Prepaid Tuition Plans
The benefits paid out from Section 529 prepaid tuition plans are treated as a resource, lowering the student's overall financial need.
The end result is a dollar-for-dollar reduction in the need-based financial aid package. For example, if the prepaid plan pays out $5,000 in tuition benefits this year, the student is considered as having a $5,000 less need for financial aid.
Congressional efforts are underway to match the financial aid treatment of prepaid tuition plans to that of Section 529 college savings plans. Until that happens, a family expecting to qualify for need-based financial aid should avoid prepaid tuition and invest in a 529 college savings plan.

CPAs Encourage College Saving
CPAs advise that financial aid eligibility should not be your primary concern when considering how to pay for college costs. Instead, focus on savings. College tuition is one of the largest expenses likely to be faced by families. The sooner you develop a savings strategy, the better you will be able to manage the costs. For more advice about the best way to save for your child's college education, consult with a CPA. If you don't have a CPA, you can easily locate one online using the NJSCPA Find-A-CPA service. Visit www.findacpa.org to locate a highly qualified professional who is right for you.

If you would like to receive more information on various financial matters, subscribe to E-CPA, the NJSCPA's free, monthly email newsletter. To subscribe, visit www.njscpa.org/finances or email a subscription request to e-cpa@njscpa.org.

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Money Management is a weekly column on personal finance distributed by the NJSCPA.

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