Parent-owned 529 plans are reported as a parent asset on the Free Application for Federal Student Aid (FAFSA), regardless of whether the beneficiary is a dependent student or the student’s sibling. Custodial 529 plans, where the student is the account owner, not just the beneficiary, are also reported as a parent asset on the FAFSA, but only if the account owner is the student, not the student’s sibling.
Reporting of 529 Plans on the FAFSA
The reporting of 529 plans as assets on the FAFSA is based on who is the account owner, not the beneficiary. Only 529 plans that are owned by a dependent student’s parent or the student are reported on the FAFSA.
- If the 529 plan of a dependent student or the student’s sibling is owned by the parent, it is reported as a parent asset on the student’s FAFSA.
- If the student is an independent student, parent-owned 529 plans are not reported as an asset on the FAFSA, but distributions count as untaxed income to the student.
- If the 529 plan of a dependent student is a custodial 529 plan, it is reported as a parent asset on the student’s FAFSA.
- If the 529 plan of the student’s sibling is a custodial 529 plan, it is not reported as a parent asset on the student’s FAFSA, just on the sibling’s FAFSA.
This is based on the definition of “assets” at 20 USC 1087vv(f)(3).
Loophole Involving Custodial 529 Plans of a Sibling
This creates a loophole where 529 plan assets of a sibling are not reported on the FAFSA if the 529 plan is a custodial 529 plan and not a parent-owned 529 plan. One strategy might be to allocate all college savings in the custodial 529 plan of a younger sibling to reduce the reportable assets for the older child.
Nevertheless, this loophole does not have a big impact on eligibility for need-based financial aid, for several reasons.
- The 529 plan assets still cause a reduction in financial aid eligibility, just for the sibling, not the student.
- The reduction in eligibility for need-based financial aid is also relatively small, at most $564 per $10,000 saved.
- If the parents have sufficient assets to eliminate eligibility for need-based financial aid, usually the parents’ income is sufficient on its own to eliminate aid eligibility even without consideration of the assets. The financial aid formulas are weighted more heavily to income than to assets.
Another loophole involves saving money in a 529 plan that is not owned by the student or parent, such as a grandparent-owned 529 plan. A grandparent-owned 529 plan is not reported as an asset on the student’s FAFSA, but distributions count as untaxed income to the student. But, one can work around this limitation by rolling over a year’s worth of funds from the grandparent-owned 529 plan to a student or parent-owned 529 plan after filing the FAFSA.
Reporting of 529 Plans on the CSS Profile
The CSS Profile is used by less than 200 colleges and universities to award their own financial aid funds.
The CSS Profile considers all 529 plans that list the student as a beneficiary, regardless of the account owner. The CSS Profile also requires sibling assets to be reported if the sibling is under age 19 and not enrolled in college.
- Will Your 529 Plan Impact Financial Aid?
- Does a Sibling’s 529 Plan Assets Hurt Financial Aid Eligibility?
- When Do 529 Plans Distributions Count as Income on the FAFSA?