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  • Writer's pictureErich Schwerd


We ALWAYS recommend that parents save for college via a 529 plan. Current US student loan debt is valued at 1.7 trillion dollars. Every little bit of money that can be put towards college will help students graduate with less of a loan payback burden.

How does a 529 plan work, and is it right for you? Investments in a 529 plan earn dividends, interest, and capital gains on a tax deferred basis. Withdrawal is generally tax free if used for qualified education expenses. Qualified educations expenses are amounts paid for tuition, fees, and other related expenses that re required for enrollment and attendance at an eligible educational institution, including books, supplies, equipment, and activity fees. Room and board, insurance, and transportation are NOT qualified expenses. Also note that payments for the academic period must be paid in the academic period. You CANNOT claim a credit, such as the lifetime learning credit, for any tax free funds that were used. However, you can coordinate benefits, by paying for a portion of qualified expenses with 529 plan funds and filing for the credit for a different portion of the expense. For more information on 529 plans and Coverdell education savings accounts, see IRS publication 970. For your specific situation, please be sure to consult your own CPA or tax professional.

Eligible educational institutions are listed at the department of education website, and include most US based universities, American universities abroad, and many non-US colleges and universities.

How does a 529 plan affect financial aid? It depends. A grandparent or other third party owned 529 plan is not reported on FAFSA at all. FAFSA stands for free application for federal student aid. However, a distribution from that fund would be considered income to the student and would be assessed at 50%, reducing the students’ eligibility for financial aid.

A parent owned 529 plan counts as a parent asset and is reportable on FAFSA. However, only 5.64% of parents’ assets are counted as part of the “expected family contribution”. Distributions for qualified expenses are not counted at all. A student owned 529 plan is reportable and 20% of the value is calculated as an expected family contribution. Distributions for qualified expenses are not counted.

The best 529 plan to have is the parent owned plan. The good news is that anyone can contribute to that plan, so grandparents can contribute to the parent plan, they don’t have to have their own plan. Other friends and relatives can contribute to the parent owned plan as well.

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