Do 529 Plans Hurt Financial Aid? | College Made Simple

It’s smart to save early for college, but a 529 plan may come back to haunt you when it’s time to apply for both federal and institutional aid…

When you sit down to fill out those financial aid forms for college, I doubt you’re thinking to yourself…


Well, I’ll take whatever they can spare… I’m not picky about how much money I get”.

No way! You want every last cent the colleges can give you for your child’s education. And as we’ve detailed here on College Made Simple, there are a few easy maneuvers you can make to ensure that ends up being the case.

Your expected family contribution (EFC) determines how much money you’re ‘expected’ to chip in for the cost of your child’s college tuition. Depending on how much money you make, the amount of savings you have and where that savings is held, this number can fluctuate drastically.

One of the ways you can keep your college costs down is by keeping your EFC as low as legally possible. And when you submit your FAFSA form, the government will take into account all your assets when determining that number.

Now one pressing concern that many families have is, “I was recommended to start a 529 plan by my financial advisor – how does this affect my ability to receive maximum financial aid?

Well, even though I myself am not a big fan of 529 plans (because I prefer certainty, guarantees, safety and liquidity over the allure of ‘possibly’ getting a higher rate of return on my savings), 529 plans do have their advantages, such as…

  • State tax breaks (although minimal) for contributions to certain plans.
  • Contributions allowed by anyone, but complete control resting with the owner of the plan, not the beneficiary.
  • Tax free withdrawals of gains (if there are any!) if used for education purposes.

However, not only am I not a fan of risking hard-earned college savings dollars in the stock market, these 529 plans can also be detrimental to your financial aid chances.

529 plans are classified as an ‘includable’ asset – meaning, they are ‘included’ in the financial aid formulas and can be counted against your EFC.

In fact, for every dollar you keep in a 529 account, 5.6 cents can be subtracted from your potential financial aid package.

That means if you have $50,000 saved up in a college savings account, you could lose around $3,000 a year in potential federal financial aid. $100,000 in savings could cost you $6,000 a year, and so on…

That’s not to mention the fact, that when individual colleges and universities hand out their need-based scholarships and grants, many of those schools will take into account if a family has a 529 plan and how much is held within it.

Because private colleges have the luxury of determining themselves how they want to distribute their own funds, they often times can count a 529 plan far worse then even the federal formulas do.

(Think about it – if you were Mrs. Financial Aid Offer and you saw that Susie Smith had $50,000 in her 529 plan, would you count that as a ‘resource of the student’ that is going to be used for college and count it more heavily against the family then if Susie Smith’s parents had the same $50,000 in a CD or a retirement plan?)

I’m not saying to go and cash out your 529 plan! All I’m saying is know your options and what is available to do BEFORE it’s too late! So many people blindly put money into the stock market or a 529 plan thinking it is there only option… when in fact, that couldn’t be farther from the truth! Truth be told, properly funded cash value insurance policies (what I use to save for my own daughter’s education) can offer guarantees, safety, liquidity, tax advantages, financial aid advantages… and many more benefits (including the fact that you can sleep at night knowing that my savings won’t be cut by 30%+ in a single year!)

In summary, make sure your money is being kept in the right place BEFORE you apply for college aid.. There’s no magic bullet and you have to take into account all of your financial goals when putting together a college savings and/or late-stage funding plan. Saving early and often for college is always good… but don’t cheat yourself by doing it the wrong way.

To your successful college search,

Scott Weingold


Related Articles:

Are 529 Plans a Good Idea?

Are 529 Plans a Good Idea? Part 2

The 529 Plan Crisis

How to Opt Out of 529 College Savings Plans

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Geraldine turleyJuly 9th, 2011 at 12:06 pm

On a FASA application does a 529 held by a grandparent need to be reported? Thank you

Lorraine AumicJuly 9th, 2011 at 7:11 pm

Please describe what you mean by “a properly funded life insur plan”. Would it be just a whole or variable policy which you simply overfund as much as you can for future tuition? I understand that it is not reportable so therefore doesn’t count against you. I have two teens and two 529 accts and since your advice I’ve stopped putting cut back the amount I was solely putting into the 529s per your advice, and with that difference have chosen to disperse it between my Roth and paying extra into a variable life policy. I can borrow from my AXA policy and has a fixed 4% interest a year. Should I stop all 529 contributions completely?

Eric RandlesJuly 10th, 2011 at 10:45 am

Will a large amount of equity in a home hurt the amount of financial aid I will receive? This might sound drastic, but should I sell my home and move into another one, or even rent for a time, in order to lower the amount of equity I have and increase the amount of financial aid?

Alicia RichardsonJuly 11th, 2011 at 12:46 pm

Hi Geraldine,

A 529 in a grandparent’s name is an asset of the grandparent and does not need to be reported on the FAFSA. There are some colleges that will ask if the student is a beneficiary of a 529 plan; in that case, you would need to report it. Schools that ask this question are very limited.

Alicia RichardsonJuly 11th, 2011 at 12:46 pm

Hi Lorraine,

A ‘properly funded life insurance plan’ is different depending on everyone’s situation… but typically refers to putting in far more cash into a traditional whole life (or fixed universal life) policy then the policy requires (to maximize the policy’s cash value – not death benefit). Variable life policies are a little scary and they often illustrate a lot better then they actually perform (if the stock market doesn’t do what the agent/advisor projects – as the market never goes up every single year). Without knowing everything about your situation, it’s hard for us to say whether you should continue with your current strategy or make any changes. My recommendation would be to set up a free analysis with one of our College Funding Advisors to review more specifics about your situation.

Alicia RichardsonJuly 11th, 2011 at 12:48 pm

Hi Eric,

It all depends on the type of college you are looking at as to how much (if at all) your equity will hurt you. Your plan to sell the house and move is a little drastic… and unless you do something with the cash once the house is sold, it will count against you sitting in a savings account. My recommendation would be to set up a free analysis with one of our College Funding Advisors to review more specifics about your situation.

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Editor's Note: Scott Weingold has been ranked the #1 “College Financial Aid Expert Worth Knowing About” in the entire country by  He has co-authored the book, “The Real Secret To Paying For College. The Insider’s Guide To Sending Your Child To College – Without Spending Your Life’s Savings.” Scott also publishes a popular free online newsletter, “College Funding Made Simple" which reveals insider’s tips, methods, and strategies for beating the high cost of college.

Scott is the co-founder and a principal of the widely renown College Planning Network, LLC – the nation’s largest and most reputable college admissions and financial aid planning firm. CPN is a proud member of the Better Business Bureau, the National Association of College Funding Advisors, the National Association for College Admission Counseling, the National Association of Student Financial Aid Administrators and the Student Affairs Administrators in Higher Education.

Scott, along with his college funding advisory team, helps thousands of families throughout the country with their college planning needs and offers a series of free educational webinars and workshops on “How To Pay For College Without Going Broke In The Process!” He's been featured or mentioned in The Philadelphia Inquirer, Yahoo News,, Voice America with Ron Adams, Crains Cleveland Business, and on Cleveland Connection with James McIntyre.  Scott has published numerous articles and is a professional speaker who has addressed thousands of audiences online and offline throughout the United States.  His actionable insights and candid, open approach have earned him & his team numerous media interviews, citations, and speaking opportunities, and his free online video workshop is one of the Internet’s most widely viewed pieces in the college funding space.