Why is it that one of the first questions parents ask about Section 529 college savings plans is how are these plans treated when calculating their child's federal financial aid eligibility? What befuddles me is the thinking that must be behind the question - that having money in one of these tax-favorable savings accounts will reduce a college student's financial aid from other sources such as grants.
There are two types of 529 plans. One is a state-sponsored investment account. Then there is a 529 prepaid tuition plan in which you purchase a contract to buy in advance all or part of a public in-state education.
Frankly, it really shouldn't matter how either account is used in the aid calculation.
Yes, any savings you have can reduce how much aid your child gets.
But the alternative is what? Not to save and pray your child will qualify for a lot of free money or federally backed loans?
Since it does matter, many parents will be happy to hear that Congress recently changed the way prepaid 529s are treated in determining financial aid.
Thanks to the Deficit Reduction Act of 2005, both prepaid and savings plans will be considered parental assets in the determination of federal financial aid beginning July 1.
I like Section 529 plans. I would rather save as much as I can than worry that if I save too much, my children won't qualify for aid.