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How a 529 Plan Affects FAFSA

infographic on how 529 plans affect financial aid

This article breaks down how a 529 plan could affect your federal financial aid.


First, let's talk about the different types of ownership:

  • Parent or Dependent Student-Owned 529 Plan: Reported as a parent asset on FAFSA. Qualified distributions are ignored.

  • Independent Student-Owned 529 Plan: Reported as a student asset on FAFSA. Qualified distributions are ignored.

  • Anyone Else-Owned 529 Plan (e.g., Grandparent, Aunt, Uncle): Not reported as an asset on FAFSA.







Impact of Distributions

  • Qualified Distributions: Not counted as income if the recipient is the student or custodial parent.

  • Non-Qualified Distributions: The earnings portion is included in the recipient’s adjusted gross income on their federal tax return, which may affect future FAFSA applications.


Recent Changes to FAFSA Rules

Recent updates have altered how 529 plans are treated:

  • Grandparent-Owned 529 Plans: Qualified distributions no longer count as untaxed income to the beneficiary and are not reported as assets on FAFSA. You can read more at The College Investor.

  • Sibling-Owned 529 Plans: Now excluded from FAFSA calculations, even if the parent is the account owner, potentially increasing aid eligibility. You can read more at The College Investor.


Strategies to Maximize Financial Aid

  • Consider Ownership: If you're a grandparent, owning the 529 plan can prevent it from affecting the student's FAFSA.

  • Plan Distributions Carefully: Avoid non-qualified distributions to prevent income from being reported on future FAFSAs.

  • Understand CSS Profile: Some private colleges use the CSS Profile, which may still consider 529 plans in aid calculations.

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