Q: Karen in Cincinnati: We have a 529 plan set-up for my daughter. Is this going to hurt her when trying to get college aid next year?
A: We have some good news. When your daughter fills out the FASFA (Free Application for Student Financial Aid), it considers a 529 college savings plan a parental asset. This kind of asset has a more favorable rate in FASFA’s Expected Family Contribution calculation (maximum of 5.64 %) than any assets in her name would have (maximum of 20%).
This, therefore, brings up a larger point. If a child does have savings and investments in their name (a bank account, non-retirement account, UTMA account, or UGMA account), it’s advantageous to try and minimize these amounts before their sophomore year of high school. This is because the FASFA looks at assets and income from two years prior to determine aid eligibility (meaning, for example, that 2020 income and assets are used for the 2022 school year). If they have earned income, you could also consider moving money from a bank account to a custodial Roth IRA since retirement accounts are not included in the FASFA formula (however, Roth IRA withdrawals are counted). But it’s also important to note that a new ‘Student Aid Index’ will be replacing the EFC for the 2023-2024 school year, so advice on this topic could be subject to change down the road.
Here’s the Simply Money Point: If your daughter has questions about the FASFA, she should visitstudentaid.gov.If you have questions about using her 529 plan efficiently, FASFA asset strategies, or how to help pay for other college expenses, a fiduciary financial advisor is always a good sounding board.