Do you understand how student financial aid works?
April 29, 2021 12:46 PM   Subscribe

Please help me come to an understanding about how US college financial aid works, with respect to when to use 529 money. OMG it's so confusing -- I have googled and for the life of me I don't understand!

Here's the scenario:

-- Family are upper middle class, and Kid will start their first year of (expensive private) College in September. College offers no merit scholarships, only need-based financial aid.

-- Per our FAFSA, we do not qualify for federal financial aid.

-- Per College, we do not qualify for a College financial aid award.

-- Grandparents started a 529 account when the kid was born, and now there's enough $ to pay for about 1.5 or 1.25 years of college.

-- College financial aid officer says: Go ahead and use that money up first. Next year, when you apply for year 2 financial aid from College, you'll report that the 529 balance is now (smaller amount) and we'll factor that into your aid award, if any.

-- Google and some friends say: Hang on, don't use that 529 $ now. Next year when you do your kid's year 2 FAFSA, they'll count that as kid's income, making you less eligible for federal financial aid. Okay but we already aren't eligible for federal financial aid (though of course things could change).

Can someone explain this to me in very basic language? Every online explanation I can find goes right over my head. I am not at all bright about financial matters, so I'll take as basic an explanation as you've got.
posted by anonymous to Education (10 answers total) 5 users marked this as a favorite
The FAFSA is used for awarding federal aid -- but most schools also use it for internal aid, because why bother asking families for all that data twice?

Now, I haven't faced this with my two college kids, but I would suggest that the college FA officer has more and better domain knowledge here than does Google or My Buddy Dave. (No disrespect, Internet Daves.) That is, the person who works in's enviornment, with the local set of rules & policies, probably can give the best advice.

If it was me, I would call back and ask the point blank, "what spending plan for the 529 gives me the best shot at obtaining FA in future years -- burn it now or portion it out over time?" The FA office always entertains requests for appeals, and I think you can do so every year.

Bear in mind that this current school year, there was cash from the feds that had to be disbursed directly to students (HELP and CARES money, the latter of which was only handed out by my son's school this week after being authorized in December), plus they haven't yet started spending the Rescue America Act cash (of which there is almost twice as much!) that was signed into law in March, 2021.

This extra, no-strings-attached cash is making things a little weird for FA, I think: schools have very little guidance on how to allocate it. For example, my son's school scaled payments according to EFC, but my daughter's school paid...a flat rate to everyone, maybe?
posted by wenestvedt at 1:05 PM on April 29 [2 favorites]

My understanding is that if the 529 account is in a parent or student's name, the withdrawals are not reported on the FAFSA so they should not affect future aid. If it is in the grandparent's name, its value should not be on the FAFSA, so it should not be affecting the financial aid award before any is withdrawn. (But it might after it is.)
posted by metasarah at 1:14 PM on April 29

The way I understand it, from my limited experience with family 529 plans, a grandparent-owned 529 plan does not count as an asset on the FAFSA. However, withdrawals from a grandparent-owned 529 plan are counted as untaxed income on the FAFSA.

This is the best explanation I've seen (with examples):
posted by bedhead at 1:17 PM on April 29

Colleges generally either use federal rules for calculating need, or they use their own rules for calculating need. Expensive private colleges are more likely to use their own rules particularly if they asked you to fill in either the CSS Profile or their own bespoke financial form.

This Forbes article seems to give a clear explanation of the implications for 529 accounts.

It says that under federal rules, a 529 account balance only counts as an asset if it is held by the custodial parent(s) or the dependent child. In both cases it counts as a parental asset. However, 529 withdrawals from an account held by anyone other than the custodial parent(s) or dependent child counts as student income.

Assets are inputted as the actual balance are on the day that you file the FAFSA. Income is from the "prior prior year" (the year before last). That means that a withdrawal from the grandparents 529 in 2021 will affect financial aid calculations for 2023-24. A withdrawal in 2022 will affect financial aid calculations in 2024-25. And a withdrawal in 2023 will affect financial aid calculations in 2025-26 (when you child may have graduated and not be using financial aid). This is why there is advice about timing the use of the 529.

When colleges use their own rules to calculate need, they decide how 529 balances and withdrawals are treated. Each college can take a different approach. They may treat balances as assets regardless of who holds them. Or they may not. Given that each college can be different, the college financial aid officer is more likely to be right than generic advice as long as they are asked the right question. I think the key is to getting them to confirm whether, in their financial aid calculations, a 529 held by a grandparent is treated as either a parental or student asset, and whether a withdrawal from a 529 held by a grandparent is treated as student income.
posted by plonkee at 1:19 PM on April 29 [3 favorites]

plonkee: I think the key is to getting them to confirm whether, in their financial aid calculations, a 529 held by a grandparent is treated as either a parental or student asset, and whether a withdrawal from a 529 held by a grandparent is treated as student income.

Right! The more specific your question to the FA officer, the easier it is for them to answer it. I still suggest you just ask: most of them are nice folks, and it's not like they get a prize for not handing out the award pool every year!
posted by wenestvedt at 1:23 PM on April 29 [3 favorites]

The college/university in question almost certainly has a net price calculator on its website. It might be helpful to use that tool to explore different scenarios. Specifically, one thing you may want to test with that calculator is if your student would be eligible for need based institutional aid after "spending down" the 529 plan in your particular situation.

This may not have a financial best answer, but you may also want to consider some alternate scenarios: what if there is a job loss or your child transfers?
posted by oceano at 2:44 PM on April 29

I'm addition to the above information, I recommend completing a demo fafsa and exclude the 529 info entirely. Take that 529less info to the school and ask them to ballpark what your aid offer would be in that situation. A lot of people overestimate how much assets are counting against them and assume they'll get a lot more once they're gone and this is often not the case.
posted by Think_Long at 3:48 PM on April 29

Also, in case it's not clear. If you do ask the college financial aid officer this specific question:

I think the key is to getting them to confirm whether, in their financial aid calculations, a 529 held by a grandparent is treated as either a parental or student asset, and whether a withdrawal from a 529 held by a grandparent is treated as student income.

This is what the answers would mean:

If they say that a withdrawal is treated as student income, you should time those no earlier than January 2023 (as long as they will graduate in summer 2025). This will mean that it has no negative effect in practice on potential financial aid.

If the withdrawal is not treated as student income, but the balance is treated as an asset, then using it earlier may mean you get better aid in future years (but obviously this is dependent on your financial situation in general).

Your child is very fortunate to have a 529 account to help pay for college, and whether you use it "perfectly" or not it will pay for a huge chunk. I wish them the best of luck and hope they have a fantastic college experience.
posted by plonkee at 4:27 PM on April 29 [2 favorites]

The Price You Pay by Ron Lieber is exactly the book you are looking for.

He has been covering higher education and financial aid for the NYTimes for many years. This is a new book that walks you step by step through the whole system. It covers the various sources of financial aid, FAFSA, how colleges consider your assets and income, and also the language that colleges use to market their offers to you. Really, if you want to understand this system, read this book.
posted by Winnie the Proust at 4:40 PM on April 29 [2 favorites]

If they are eligible for neither federal nor school aid, and don't anticipate major life changes, I'm not sure how any of this matters.
posted by praemunire at 5:17 PM on April 29

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