January 15, 2005 07:30 AM
Financial-Aid Rules Sow Confusion for 529 Owners
Excerpt: Depending on where you go to college and the source of your aid, savings held in 529 accounts may count as either the parents' assets, the student's money, both, or neither, when it comes to calculating a student's eligibility for federal financial aid or private aid from the college or university.
Lately, Frank Vellucci is feeling like no good deed goes unpunished.
In late 2003, the 32-year-old Manhattan corporate attorney set up 529 plan college-savings accounts for his six nieces and nephews, keeping the accounts in his name and naming each child as a beneficiary.
Recently, Mr. Vellucci says, a financial planner told him that the assets in the 529 plan account would slash the amount of financial aid his high-school senior nephew would be eligible to receive in the coming school year.
"I do not want to jeopardize my nephew's financial-aid opportunity, since he will need financial help during college," he says.
Hoping the planner was wrong, Mr. Vellucci contacted Vanguard Group, his 529 plan manager. A representative, he says, informed him just the opposite was true. If the parent owns the 529 account and the child is a beneficiary, then the money is treated as though it's the parent's asset. But in cases like Mr. Vellucci's, where someone other than the parent or student is the account owner, the assets have no bearing on the student's eligibility for federal financial aid, the rep said.
So who's right? They both are – and therein lies the problem with 529 plans for families who may be likely to receive some form of need-based financial aid. Depending on where you go to college and the source of your aid, savings held in 529 accounts may count as either the parents' assets, the student's money, both, or neither, when it comes to calculating a student's eligibility for federal financial aid or private aid from the college or university.
Conflicting Formulas
College savings 529 plans have become popular with investors like Mr. Vellucci because of the tax benefits: Contributions may be tax-deductible depending on your state, and withdrawals for IRS-approved higher-education expenses currently are tax free. In some plans a person can sock away as much as $300,000 per student, and unused monies can be transferred to a sibling or other student.
The problem is the federal government and public colleges treat 529 accounts differently than private colleges treat them when designing aid packages. And private schools often differ from each other in how they treat the accounts.
Because the rules for financial-aid eligibility are all over the map, parents and family members may limit their child's eligibility for financial aid merely by funding a 529 account. Insane? Yes. But not at all surprising that a financial-planning nightmare would ensue after lawmakers get involved with helping you manage your finances. (Heaven help Social Security!)
Federal vs. Institutional Needs
As it stands now, the government formula counts 529 accounts opened in a parent's name as the parent's asset, and up to 5.6% of parental assets are considered fair game to pay for college expenses. But if the parent set up the same account in the child's name – almost always a big mistake – up to 35% of the account may be considered fair game to pay for college costs. Rollover 529 college savings plans, which receive funds from taxable custodial accounts ("UGMAs" and "UTMAs"), and 529 prepaid tuition plans, which let parents to lock in tuition rates, are considered student assets for financial-aid purposes.
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