How to Report 529 College Savings Plans on the FAFSA

Each year, students and their parents must complete and submit the Free Application for Federal Student Aid (FAFSA) to qualify for financial aid. In addition to asking questions about income and family-owned businesses, the FAFSA also considers investments and college savings accounts when determining aid eligibility.

What is a 529 College Savings Plan?

One of the best ways to save for college is a 529 College Savings Plan. It is a state-sponsored investment account that increase in amount each year. These college savings accounts can grow tax free, and withdrawals made from these accounts are tax free as long as the funds are used for education expenses. Many states also offer annual tax deductions or credits for contributions made to 529 college savings accounts.

Does a 529 Affect Your FAFSA?

A 529 college savings plan account that is owned by the student or the student's parent must be reported as an investment asset on the FAFSA. Distributions from such a 529 plan are not reported as income on the FAFSA.

Does a 529 Plan Impact Your Financial Aid Eligibility?

Families sometimes get confused about the difference between a 529 plan's owner, beneficiary and custodian. Every 529 college savings plan account has an account owner and a beneficiary. The owner has control over the account and can change the beneficiary. The beneficiary is the student who will receive the funds from the account to pay for college costs. However, ownership can be tricky and could impact your financial aid negatively.

Parent Owned Plan

In many cases, the parent is the account owner of a 529 college savings plan and the student is the beneficiary. There are circumstances, however, that cause quite a few questions to arise. When the student's parents are divorced, only one of them is responsible for completing the FAFSA. This parent is the one with whom the student lived the most during the 12 months ending on the FAFSA application date (or failing that, the parent who provided the most support). This parent is referred to as the custodial parent, and the other parent as the non-custodial parent. Only the custodial parent's income and assets (plus the stepparent's income and assets, if the custodial parent has remarried) must be reported on the student's FAFSA. The non-custodial parent's income and assets are ignored. It does not matter whether the custodian on a custodial 529 plan account is the custodial parent or the non-custodial parent. With a custodial 529 plan, the custodian is a placeholder for the student, not the account owner. The custodial 529 plan account is owned by the student, and if the student is a dependent student, treated as an asset of the parent who completes the FAFSA. This is in contrast with a scenario in which the non-custodial parent is the owner of a 529 college savings plan account and not just the custodian on a custodial 529 college savings plan account. When the non-custodial parent owns a 529 plan, that 529 plan is not reported as an asset on the student's FAFSA, but any distributions from such a 529 plan are reported as untaxed income to the student. This can have a severe negative impact on the student's eligibility for need-based aid. There are two effective workarounds. One involves changing the account owner from the non-custodial parent to the custodial parent. The other involves waiting until the student's senior year in college to take a distribution from the 529 plan account, when there will be no subsequent year's FAFSA to be affected.

Student Owned Plan

Sometimes, however, the student is both the account owner and beneficiary of a 529 College Savings Plan. This can occur when the money invested in the 529 plan account came from an UGMA or UTMA bank or brokerage account. Since minor children cannot legally own assets, the money is invested in the custodial version of a 529 plan account where a custodian (often a parent) acts on behalf of the child until the child reaches the age of majority. The custodial 529 plan account is titled the same way as the UGMA or UTMA account it replaced. Even though the custodian can control the account on behalf of the child, the child is considered the account owner, not the custodian. The custodian cannot change the beneficiary on a custodial 529 plan account. So normally a student who owns a 529 college savings plan will report the plan's value as a student investment on the student's FAFSA. This is the case for independent students as well as dependent. When a dependent student owns a 529 plan, the 529 plan is treated as though it were a parent asset on the student's FAFSA. This yields a more favorable treatment since student assets are assessed more heavily than parent assets.

Grandparent Owned Plan

Only 529 college savings plans that are owned by the student or the student's parents are reported as assets on the FAFSA. A 529 plan owned by a grandparent or other third party will not be reported as an asset on the FAFSA. However, qualified distributions from such a 529 plan are treated as untaxed income to the beneficiary on the subsequent year's FAFSA, potentially having a big impact on eligibility for need-based financial aid. Non-qualified distributions are included in the adjusted gross income of the beneficiary regardless of who owns the 529 plan. To summarize: • If the custodial parent owns a 529 plan account, it is reported as a parent investment asset on the student's FAFSA and distributions from this 529 plan account are ignored. This is regardless of whether the student or someone else is the beneficiary. • If the non-custodial parent owns a 529 plan account with the student as the beneficiary, it is not reported as an investment asset on the student's FAFSA, but any distributions are reported as untaxed income to the student on the subsequent year's FAFSA. • If a dependent student owns a custodial 529 plan account, it is reported as though it were the custodial parent's asset on the student's FAFSA, regardless of whether the custodial parent or the non-custodial parent is the custodian on the custodial 529 plan account. • If an independent student owns a custodial 529 plan account, it is reported as a student investment asset on the student's FAFSA. Check out our FAFSA Resource Center for more tips, tricks and expert advice on completing the FAFSA and maximizing financial aid eligibility.