College Planning: 529 Plans, the FAFSA and You
Financial Planning

College Planning: 529 Plans, the FAFSA and You


“College is a fun and exciting time in a young person’s life but can also cause financial stress on a family if not adequately planned for.”

Tis the season for high school seniors across the country to choose where they intend to spend the next 4-6 years of their lives. Deciding where to go to college is not a decision to be taken lightly and neither is how to pay for it. Because of that, it’s also the time of year when parents come face-to-face with the dreaded 5-letter word: FAFSA. The 2020-21 FAFSA (Free Application for Federal Student Aid) became available on October 1st. The application should be simple, yet year after year, families struggle to decipher exactly what each question is asking, and which assets and income need to be included for consideration. In this post we will provide tips and advice to those who are currently filling out the FAFSA as well as offer insights for parents and grandparents of younger children on how to prepare now, such as where and how assets are held, specifically 529 accounts, to help give their children the best chance at financial aid in the future.

For those of you gearing up to complete the application this fall, here are some considerations:

  1. Don’t wait! - The sooner you complete it, the better. Students who file earlier, tend to receive more grants on average compared to those who file later (Kantrowitz, 2019). State grants may have earlier deadlines than the FAFSA itself. Also, Oregon and Washington (along with a few other states) are states that offer grants on a first-come, first-served basis.
  2. Be prepared with the information you will need – The FAFSA is filled with questions pertaining to finances and income as well as personal identification questions for both the parents and the student. Having your most recent tax return as well as everyone’s social security and driver’s license numbers will help you save time. A complete list of all your accounts and assets with their current market values will also be extremely helpful to have on hand.
  3. Work through the form slowly – You and your prospective student should read through the application multiple times with a careful eye to help ensure accurate responses are provided. There are separate sections for the parents and the student to complete and it’s important that your student is involved in the process. When parents attempt to complete the student section of the application, it is easy to become confused with whose income and assets are in question. With the student completing their own sections, the chances of confusion decrease. Plus, a second set of eyes never hurts.
  4. Ask for help – If you reach an area of the application that doesn’t make sense or if there is a question that you would like more clarity around, reach out to the FAFSA support center. They are available by phone, email, and live chat. It is better to spend more time upfront to confirm that you are filling out the form correctly, than to find out later that a mistake was made and needs to be corrected, thus causing a delay in processing and potentially impacting the amount of aid the student receives.
  5. Everyone should complete the FAFSA- There can be a misconception that families that are more financially stable or wealthy shouldn’t bother with the FAFSA. Even if you think you won’t qualify for financial aid, it is important to fill out the application as it is required for merit-based scholarships as well as eligibility for federal student loans.

If you have younger children, there are still things you can do today to prepare your child to have the best chance to receive financial aid when the time comes. One of the most important details to be aware of is the difference between reportable and nonreportable assets. Reportable assets are taken into consideration on the FAFSA as potential sources of funding for the child’s education. The higher the value of the reportable assets, the less aid the student is likely to receive. The table below illustrates these asset groups:


Parents are often aware that owning their child’s 529 plan affects the FAFSA and therefore they will have a grandparent or other family member own the account. This works well for the first year of college, but there may be financial implications for the following years. If a distribution from the 529 plan was made on behalf of the student to pay for college, they now have reportable untaxed income when the student fills out the FAFSA in the following years. It’s important to note that assets or income in a student’s name are assessed more heavily than the parents’, with 20% of assets and 50% of a student’s income considered available funds to pay for college. Parent assets are assessed at a maximum of 5.64% and their income at 47%. Consider a student that has $20,000 saved in a 529 plan. If the student’s parent owns the plan, financial aid eligibility would be reduced at a maximum of $1,128 (5.64%). However, if a grandparent owns the plan and a $20,000 distribution is taken to pay for a year’s tuition, financial aid eligibility may be reduced up to $10,000 (50%).

Often, grandparents or other family members want to own the child’s 529 account for tax purposes while contributions are being made. If that is your situation, having a different family member own the 529 plan works well until the student needs to take distributions. Prior to the student taking a distribution, you may want to change the account owner to a parent to ensure maximum eligibility is achieved. One potential workaround for at least the first year of college, is to file the FAFSA prior to changing the owner of the 529 account. This allows for the account to be a nonreportable asset on the first year’s FAFSA. However, be aware that with filing applications and changing account ownership on specific timelines, there is more room for error. The safest route would be to change the ownership to a parent well before any distribution needs to be made. The effects of it being counted as income to the student can be quite impactful.

College is a fun and exciting time in a young person’s life but can also cause financial stress on a family if not adequately planned for. It is crucial for parents to be prepared for the cost of college – filing the FAFSA, ownership of 529 plans, and proper education planning should be seen as tools to help do so.

If you have questions about planning for college, consider our wealth planning team as an excellent resource for Becker clients. We would love to work with you on all your education planning needs.

Kantrowitz, Mark. “FAFSA deadlines.” Savingforcollege, 30 Sept. 2019