Does the Student or Parent Own the 529 Plan and Report on FAFSA?

This article explains how the ownership of a 529 plan—whether by the student, parent, or another party—affects its reporting on the FAFSA and impacts financial aid eligibility.

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When it comes to saving for college, 529 plans are one of the most popular tools due to their tax advantages and flexibility. However, understanding how these accounts are treated on the Free Application for Federal Student Aid (FAFSA) can be confusing. The ownership of a 529 plan—whether it’s held by the student, parent, or even a grandparent—determines how it is reported and how it impacts financial aid eligibility. Parent-owned 529 plans are reported as parental assets on FAFSA, assessed at a favorable rate of up to 5.64%, while student-owned plans are treated more heavily, with up to 20% of their value considered in financial aid calculations. On the other hand, third-party-owned plans like those held by grandparents are not reported as assets but can still affect aid eligibility through distributions. This article will guide you through who owns the 529 plan, how it’s reported on FAFSA, and what that means for your financial aid prospects.

What Is a 529 Plan?

A 529 plan is a tax-advantaged savings account designed specifically for education expenses. Contributions grow tax-free, and withdrawals are not taxed when used for qualified education costs like tuition, room and board, and books. While these accounts offer significant benefits for college savings, their impact on financial aid depends largely on ownership.

How Does Ownership Affect FAFSA Reporting

How Does Ownership Affect FAFSA Reporting?

The FAFSA assesses assets and income to calculate a family’s Student Aid Index (SAI), formerly known as Expected Family Contribution (EFC). The ownership of a 529 plan determines how it is reported and its weight in financial aid calculations.

Parent-Owned 529 Plans

  • Reporting: Parent-owned 529 plans are reported as parental assets on FAFSA.
  • Impact: Only up to 5.64% of the account’s value is considered in financial aid calculations.
  • Distributions: Qualified withdrawals from parent-owned plans are not treated as income for the student.

Student-Owned 529 Plans

  • Reporting: If a dependent student owns the plan, it is still treated as a parent asset on FAFSA.
  • Impact: This yields the same favorable treatment as parent-owned plans (5.64% assessment).
  • Independent Students: For independent students without dependents, up to 20% of the account’s value is assessed.

Third-Party-Owned Plans (e.g., Grandparents)

  • Reporting: Grandparent-owned or other third-party-owned plans are not reported as assets on FAFSA.
  • Impact: Starting with the 2024-2025 FAFSA changes, distributions from these accounts will no longer count as untaxed income for students.
  • Benefit: This change eliminates a significant penalty that previously reduced financial aid eligibility.

Key Scenarios for Reporting 529 Plans

  1. Parent-Owned Plan with Student Beneficiary
    A parent owns the account with their child listed as the beneficiary. The account is reported as a parental asset at up to 5.64%, minimizing its impact on financial aid eligibility.
  2. Custodial 529 Plan Owned by Dependent Student
    Even though the student technically owns this account, it is treated as a parental asset if they are dependent. This prevents harsher assessments of up to 20%.
  3. Grandparent-Owned Plan
    Previously, distributions from grandparent-owned plans counted as untaxed income to students in future FAFSA filings. However, under new rules effective in 2024-2025, these distributions will no longer affect aid eligibility.
  4. Sibling-Owned Custodial Plan
    If a sibling owns a custodial 529 plan with funds earmarked for themselves or another sibling, those funds are not reported on FAFSA unless they directly benefit the student filing.
How to Minimize Financial Aid Impact

How to Minimize Financial Aid Impact?

  1. Use Parent-Owned Accounts
    Parent-owned accounts receive favorable treatment under FAFSA rules compared to student-owned or independent accounts.
  2. Leverage Grandparent-Owned Plans Strategically
    With new FAFSA rules eliminating penalties for distributions from grandparent-owned plans starting in 2024-2025, these accounts can be powerful tools for funding education without reducing aid eligibility.
  3. Time Distributions Wisely
    If using third-party-owned accounts like grandparent plans before rule changes take effect, avoid making distributions during years that affect FAFSA reporting.
  4. Consider Beneficiary Changes
    Parents can temporarily change beneficiaries on their accounts to reduce reportable assets during FAFSA filing years and switch back afterward if allowed by state rules.

FAFSA vs CSS Profile Reporting

While FAFSA focuses only on parent- or student-owned accounts tied directly to the applicant, some colleges require additional forms like the CSS Profile:

  • The CSS Profile considers all 529 plans where the student is listed as a beneficiary, regardless of ownership.
  • Sibling-owned accounts may also be included if siblings are under age 19 and not enrolled in college.

This deeper dive into family finances means families should carefully review CSS Profile requirements when applying for institutional aid.