If I Invest in a 529 Plan in 2024, Will It Impact Financial Aid?

As 2024, starts, many families are considering investing in a 529 plan but don’t understand the impact it will have to financial aid. Understanding recent changes effective for 2024 is crucial for families planning to utilize 529 plans for their children’s education. Let’s delve into the intricacies of how 529 investments may influence financial aid eligibility and the recent adjustments that could shape your financial strategy.

529 Plans Owned by Relatives or Friends: One key aspect to consider is that 529 plans owned by grandparents, relatives, or friends are treated differently than those owned by the student or parent. In the past, on FAFSA forms filed before the 2024-25 academic year, accounts owned by relatives or friends were not counted as assets, offering a potential advantage. However, any withdrawals from these accounts had to be reported as unearned income on subsequent FAFSA forms, impacting financial aid by as much as 50%.

New FAFSA Rules for 2024-2025: Under the simplified FAFSA form, effective for the 2024-25 academic year, 529 accounts owned by relatives or friends will not be factored into the Expected Family Contribution (EFC). Additionally, withdrawals from these accounts will not be considered as student income. This modification, aligned with new federal financial aid rules, brings relief to families utilizing third-party-owned 529 plans, ensuring a more accurate reflection of their financial situation.

The FAFSA Simplification Act: Anticipated to debut in December, the FAFSA Simplification Act for the 2024-2025 academic year introduces several changes. Notably, this act is welcoming news for grandparents aiming to contribute to their grandchildren’s college education. Previously, contributions from grandparents were treated as untaxed income on the FAFSA, potentially affecting the student’s eligibility for financial aid. However, with the upcoming changes, distributions from third-party-owned 529 plans will not need to be reported on the FAFSA, allowing grandparents to support their grandchildren’s education without compromising aid eligibility.

Navigating 529 Plans: A 529 plan is a tax-advantaged account designed for funding educational expenses. When owned by a dependent student or custodial parent, the total value of the 529 plan is reported as an investment asset on the FAFSA. However, changes in the reporting of third-party-owned 529 plans mean that grandparents can now distribute funds without negatively impacting student aid.

Considerations for Withdrawals: While the new rules bring welcome flexibility, some key considerations remain. Distributions from grandparent-owned 529 accounts paid directly to the school will not affect aid eligibility. However, it is advisable to pay the student directly until there is more clarity on the new rules.

Timing and Limits: Withdrawals should align with the tax year in which educational expenses will be paid. The amount withdrawn cannot exceed the cost of qualified educational expenses billed by the school. Any excess withdrawn must be repaid within 60 days to avoid a 10 percent penalty.

Consult with Professionals: It’s crucial to recognize that the FAFSA Simplification Act addresses federal financial aid rules, and individual schools or private student loan programs may have their own guidelines. Families are encouraged to consult with a fee-only financial adviser or the college financial aid office to understand how these changes apply to their unique situation. The expertise of professionals can help navigate complexities and optimize financial strategies for both education and long-term security.

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