We have a son who is going to be in the 10th grade this year. We
also have twins who are 3.5 years old. I am trying to understand where
to park my savings for elder son and the little ones. I heard if we have
529 plans, they will be included in financial aid calculations and
this is not a good idea. How about savings bonds? How about savings bonds
in little ones names? Would they be counted as parent assets? Is there
a way to avoid having 529 plans counted as a parent asset?
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When a 529 college savings plan is owned by the student or the parent,
it is treated as a parent asset on the Free Application for Federal
Student Aid (FAFSA). Parent assets are large enough to affect
eligibility for need-based aid for less than about 4% of dependent
students. The worst-case impact is a reduction in aid eligibility
equal to 5.64% of the asset value. This is much more favorable than
the normal treatment for student assets, such as UGMA and UTMA
accounts, which reduce aid eligibility by 20% of the asset
value. Distributions from a student or parent-owned 529 plan are
disregarded on the FAFSA.
If a 529 plan is owned by someone other than the student or parent, it
is not reported as an asset on the FAFSA. However, any distributions
from such a 529 plan will be treated as untaxed income to the
beneficiary. This can reduce aid eligibility by as much as half of the
amount of the distribution. Usually that yields a much more severe
impact on aid eligibility than if the college savings plan were owned
by the student or parent. So strategies involving ownership of a 529
plan by a grandparent, aunt or uncle can backfire, hurting
eligibility for need-based financial aid.
Savings bonds that are registered with the parent as the owner are
treated as a parent asset on the FAFSA. If the student is the bond
owner, then the savings bonds are listed as a student asset on the
FAFSA. A beneficiary of a savings bond is not the bond owner.
If the parent is the owner of a US savings bond, that bond can be
redeemed tax-free to roll the funds into a 529 college savings plan or
to pay for college costs in certain circumstances. If the student is
the owner of the savings bonds, the savings bonds will not qualify for
Any assets owned by the student's siblings are not reported on the
FAFSA. This includes savings bonds that are owned by the sibling, as
well as custodial bank and brokerage accounts. But the sibling-owned
assets will hurt the sibling's eligibility for need-based financial
aid when the sibling eventually enrolls in college. Also, as noted
above, savings bonds owned by a sibling won't qualify for tax-free
529 college savings plans are one of the best options for saving for
college, in part because student or parent-owned 529 plans are treated
favorably on the FAFSA. Parent assets have a minimal impact on
eligibility for need-based financial aid. For example, $10,000 in a
529 plan will reduce aid eligibility by at most $564, which still
leaves the family with $9,436 to pay for college costs. 529 plans also
have a favorable tax treatment. Earnings accrue on a tax-deferred
basis and will be entirely tax free if used to pay for qualified
higher education expenses. There are no income phaseouts on the
tax-free treatment of 529 plan distributions as there are for
redemptions of US savings bonds. In addition
contributions to a state's 529 plan are tax deductible
on the contributor's state income tax return in 34 states and the
District of Columbia. No similar benefit is available for US savings bonds.