A 529 account is a way to save for your college education. It can be used to pay for tuition, fees, room and board, and other educational expenses. The rest of the costs are the responsibility of the student. The money from the 529 account can be used for textbooks, laboratory fees, special needs assistance, and computer and software purchases.
The federal financial aid formula is complex and many factors are considered. Your 529 account can affect your financial aid award, but the impact will vary depending on what you put in your account. You must remember that you must put a certain percentage of your assets into the account, or your financial aid award may be reduced.
The growth of your 529 account depends on investment income and interest rates. If you contribute the maximum amount allowed for a 529 plan, you can expect a high return on your investment. However, if you’re concerned about your child’s financial aid eligibility, you can consider opening a 529 account.
529 plans are tax-advantaged savings plans. They are sponsored by state agencies and educational institutions. The federal government authorizes them as “qualified tuition plans”. There are two types of 529 plans: prepaid tuition plans and education savings plans. Most states offer at least one type. A 529 plan will help you save money for college expenses, such as books and supplies, and even a computer or Internet access.
Your 529 account will also help cover the cost of tuition and room and board, as long as you’re enrolled at least half time. This means that you can save money for college and take out fewer loans later on. However, college is not cheap. You may not realize it, but costs for college increase twice as fast as the rate of inflation, or 5% every year. It’s best to start saving now rather than wait until you have to borrow money for college. Investing in a 529 account now will help you qualify for more aid later.
When applying for financial aid, you should keep in mind that a 529 plan is not a guarantee of financial aid. Withdrawals from a 529 account will not impact your eligibility for merit-based aid, scholarships, and education tax credits. However, if you do decide to withdraw money from a 529 account, you must report the withdrawal to the College Board.
If you don’t want to use the 529 account for college, you can transfer it to a family member. If the 529 account belongs to someone else, it won’t count towards your financial aid calculations. Nevertheless, any cash gifts from grandparents will still be credited as income. It’s also a good idea to consider getting a financial advisor to help you navigate these rules.
The SECURE Act, or the Setting Every Community Up For Retirement Enhancement Act, has expanded the pool of people who can receive tax benefits from a 529 plan. The SECURE Act has also changed the rules regarding student loan withdrawals, which used to have many consequences for college-going students.