Do 529 Plans Affect Eligibility for Federal Student Loans?

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By Mark Kantrowitz

June 2, 2020

A parent, who has 529 plans for his children, wants to know whether this means that they will be ineligible or at a disadvantage for future federal student loans.

Generally, having a 529 college savings plan does not affect eligibility for student loans.

The main potential impact is on the type of student loans available to the student, not the amount they can borrow. The Federal Direct Stafford Loan for undergraduate students comes in two versions. Subsidized loans are based on financial need. Unsubsidized loans are not based on financial need. Anything you don’t get as a subsidized loan you can borrow as an unsubsidized loan.

Financial need is based on the difference between total college costs and the expected family contribution (EFC). The EFC is based on the income and assets of the parents and student, the family size and the number of children in college, among other factors. Having more assets, like a 529 plan, will tend to increase the EFC and thereby reduce financial need.

Use our Financial Aid Calculator to estimate your expected family contribution (EFC) and financial need based on student and parent income and assets, family size, number of children in college, age of the older parent and the student’s dependency status.

But, the impact of 529 plans on the EFC is small. A parent-owned 529 plan is reported as a parent asset on the Free Application for Federal Student Aid (FAFSA). Parent assets are assessed on a bracketed scale, with a top bracket of 5.64%. Thus, $10,000 in a parent-owned 529 plan will reduce financial need by at most $564.

That still leaves you with at least $9,436 to pay for college. Thus, money in a 529 plan reduces the need for student loan debt. It also provides the family with more flexibility to send the child to a college that they otherwise could not afford.

Income and assets do not affect eligibility for unsubsidized loans. A parent could be very wealthy and nevertheless qualify for unsubsidized loans.

A good place to start:

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