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Financial Aid and the Effect of 529s

  • Oppenheimer & Co. Inc.
  • November 26, 2019

As the cost of college and related higher education expenses grow, understanding how financial aid and the application process work have become critically important to students and families. The impact that certain assets have on your access to financial aid can also be baffling and mistakes can be avoided. To help make some sense of the process, Oppenheimer & Co. Inc. has developed the following primer on financial aid and the impact of 529 college savings plans.


Financial Aid Primer

Financial aid is money given to a student to help pay for college, career or graduate school. This needs based support may consist of one or more of the following sources:

Loans – borrowed money which must be repaid with interest
Grants – aid that doesn’t have to be repaid (unless a student withdraws from school)
Work-study – programs where students work part-time to earn money for tuition
Scholarships – aid offered from a school’s own funds

The typical financial aid package contains all of these types of options. Some packages may be more attractive than others based on the amount of each type of financial aid offered. For example, grants are more favorable than loans because they don’t need to be repaid but there’s been a declining trend in the rate of grants awarded. This puts into perspective what qualifying for more financial aid can mean. There are no guarantees that a larger financial aid award will consist of favorable grants or scholarships and your child may simply have to apply for and pay back loans. The financial aid process was developed to measure how much a family can afford to pay for college and provide various solutions should they encounter a shortfall. The institutions that offer needs-based financial aid determine how much a family should be expected to contribute based on income and assets, before financial aid is offered. Financial aid can come from the federal or state government or the college or institution. There are different financial aid formulas, taking into account various aspects of a family’s economic state, looking at assets, income and their source.

The two main sources of financial aid are the federal government and the colleges themselves. To determine a student’s financial need, the federal government uses a formula known as the “federal methodology”. Colleges use a formula known as the “institutional methodology” to determine private financial aid awards. How your 529 plan is assessed differs depending on the methodology. Although the federal government and individual colleges may use different formulas to assess financial need, the process for a student and his or her family is the same. It begins by completing the FAFSA (Free Application for Federal Student Aid). This is the application provided by the US Department of Education. The FAFSA will require you to provide information about your current financial situation, including assets and income. In addition to the FAFSA, some colleges also request an application known as the CSS Profile. The CSS Profile, offered by the College Board, employs the “institutional methodology” and requires more granular financial information than the FAFSA. This application is not free and is only used by certain schools.

Each methodology is used to determine your Expected Family Contribution or “EFC”. The EFC is a measure of your family’s financial strength (based on your family’s taxed and untaxed income, assets and benefits) and is calculated according to a formula established by law. Simply, EFC is the money your family has available for college costs for that year. The EFC also considers your family size and number of members who will attend college during the school year. The US Department of Education uses their EFC calculation to distribute federal aid, while colleges use their EFC figure to determine private aid. It’s important to note that your EFC is not the amount of money your family will have to pay for college nor is it the amount of federal student aid you will receive. It is simply the number used by your school to calculate the amount of federal student aid you are eligible to receive.

The Cost of Attendance or “COA” includes tuition, fees, room and board, books, supplies, transportation, and personal expenses. The calculation of this figure, mandated by Congress, estimates costs for a school year at a particular college. This number can vary substantially depending on the school. The difference between your EFC and the COA of a particular college will determine your child’s financial need. The results of your FAFSA are sent to every college that your child applies. If accepted, the school will develop a financial aid package made up of loans, grants, scholarships, and work-study jobs to help meet that student’s financial needs. Some of the aid may come from federal programs while the remainder may come from the college’s own endowment funds. It’s important to note that colleges aren’t obligated to meet 100% of your child’s financial need. If there’s a shortfall, you’re responsible for the balance. Also, remember that the FAFSA will need to be completed prior to each year your child begins enrollment.

To help cover difference between your EFC and COA, there are several different types of education savings accounts you can use for future education expenses. They include but are not limited to Uniform Gift/Transfer to Minors Act (UGMA and UTMA) custodial accounts, Coverdell Education Savings Accounts (ESAs) and 529 College Savings Plans. UGMA and UTMA accounts and trusts are a great way to establish investments for minors but are not specifically earmarked for college expenses. Assets gifted to UGMAs or UTMAs are owned by the child. Once a child reaches their state’s age of majority he or she can use the assets any way they like. As assets owned by the child, they can also have a greater impact on the ability to receive needs-based financial aid. Coverdell Education Savings Accounts (ESAs) use after-tax dollars to grow tax free with no taxes on distributions used for qualified expenses. ESAs employ flexible investment choices similar to IRAs but there are income restrictions and a contribution limit of $2,000 per year. With a Coverdell ESA, once the child reaches the age of 18, control of the account is given and they can decide how they want to use it, including withdrawing for uses other than education. As with ESAs, 529 college savings plans use after-tax dollars and grow tax-free with no taxes on distributions used for qualified expenses but contribution limits are dramatically higher, ranging from $235,000 to $529,000 depending on the state. Unlike ESAs and UGMA and UTMA custodial accounts, 529 college savings plans are not irrevocable gifts. The parent as account owner retains control of the assets (even if others, like grandparents, are permitted to contribute to it). Let’s take a closer look at the impact 529 college savings plans have on financial aid.

Although income has a much greater impact on eligibility for need-based financial aid than assets, recognizing the effect assets have on these calculations is important. The following comparisons will use the federal methodology to assess the impact of certain investments. Under the federal methodology, 529 college savings plans are considered an asset. 529 plan assets are weighted differently, depending on whether they are owned by the parent or the child. The difference can significantly impact the amount of financial aid available to your child. As the parent and owner of a 529 college savings plan, the value of the account must be listed as an asset on the FAFSA. Under the current federal formula, a parent’s 529 assets are assessed at a maximum annual rate of 5.64%. This means only 5.64% of the parent owned 529 assets would be considered available to help pay the cost of college for the upcoming year. In comparison, a student-owned 529 plan is currently assessed at a rate of 20%. With regard to the designation of a 529 plan as a parental asset, please note that:

• A parent can only list a 529 plan as an asset if he or she is the account owner of the plan. If owned by a grandparent, then the 529 plan is not listed as an asset on the FAFSA.
• Any student-owned or UTMA/UGMA-owned 529 account is also reported as a parent asset if the student fi les the FAFSA as a dependent student. A 529 account is considered an UTMA/UGMA-owned account when UTMA/UGMA assets are transferred to a 529 account.
• If the parents’ income is less than $50,000 and they satisfy certain other criteria (type of tax return filed, receipt of certain federal benefits or a parent is a dislocated worker), all assets are disregarded on the FAFSA. Known as the Simplified Needs Test, under these conditions the federal government doesn’t count any of your assets in determining your EFC, so your 529 plan wouldn’t affect financial aid eligibility at all.
• Distributions or withdrawals from a parent-owned 529 plan that are used to pay the beneficiary’s qualified education expenses aren’t classified as either parent or student income on the FAFSA the following year. However, distributions from a grandparent-owned 529 account are counted as student income on the FAFSA the following year, which has the effect of reducing a student’s aid eligibility because student income is assessed at 50%.

Using the federal methodology, Coverdell ESAs owned by a parent are considered parental assets and counted at a rate of 5.64%. However, UTMA and UGMA custodial accounts and trusts are considered student assets and assessed at a rate of 20% when calculating the EFC. Distributions from a Coverdell ESA that are used to pay qualified education expenses are not counted as parent or student income on the FAFSA and therefore do not reduce financial aid eligibility. It’s also important to note that the federal government excludes retirement accounts (e.g., traditional IRAs, Roth IRAs, employer-sponsored retirement plans, etc.), cash value life insurance, home equity, and annuities from consideration in the financial aid process.


U.S. Department of Education; Federal Student Aid;;; The College Board; https://cssprofi; The Investment Company Institute;


This article is intended for informational purposes only. All information provided and opinions expressed are subject to change without notice. No part of this article may be reproduced in any manner without the written permission of Oppenheimer & Co. Inc. (“Oppenheimer”). ©2019 Oppenheimer & Co. Inc. Transacts Business on All Principal Exchanges and Member SIPC. 2845454.1

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