Education Savings
IN THIS LESSON
Are you considering saving for education but worried about how it might impact financial aid eligibility?
Congress enacted ESAs and 529 plans accounts specifically designed to as a way to alleviate the financial burden of higher education and promote greater access to educational opportunities for individuals and families. These plans also come with more favorable treatment to financial aid. While education savings accounts like 529 Plans and ESAs can impact financial aid eligibility, they are often considered more favorably compared to other types of investments. Families should carefully consider the implications of all their assets and investments when planning for education expenses and financial aid to make informed decisions about saving for education. Here is an overview of different account types:
529 Plans:
529 Plans owned by parents or dependent students are typically considered parental assets on the Free Application for Federal Student Aid (FAFSA). Only a maximum of 5.64% of the account’s value is factored into the Student Aid Index (SAI), which determines eligibility for need-based financial aid. This treatment is more favorable compared to assets held in the student’s name, which are assessed at a higher rate (up to 20%).
Parents retain control over 529 Plan funds, and withdrawals for qualified educational expenses are not counted as income on the FAFSA. Contributions to a 529 Plan may reduce the amount of financial aid awarded, but the impact is generally considered less than other types of assets or income. Additionally, who owns the 529 plan plays an important role in its impact on the student’s financial aid status.
ESAs:
Coverdell Education Savings Accounts (ESAs) are treated similarly to 529 Plans for financial aid purposes. ESAs owned by parents or dependent students are considered parental assets on the FAFSA and are assessed at a maximum rate of 5.64%. Like 529 Plans, parents have control over ESA funds, and withdrawals for qualified education expenses are not counted as income on the FAFSA.
Contributions to an ESA may also reduce the amount of financial aid awarded, but the impact is generally less significant compared to other types of assets or income.
Other Types of Investments:
Investments held in the student’s or parent’s name, such as savings accounts, brokerage accounts, and mutual funds, are generally assessed at a higher rate on the FAFSA compared to 529 Plans and ESAs (up to 20%). Income from these investments and taxable accounts can significantly impact financial aid eligibility.
Control over funds may vary depending on the type of investment account, and contributions to taxable investment accounts can increase the family’s assets and income, potentially reducing financial aid eligibility.
Withdraws from these accounts also create a taxable event. It’s important to understand the tax implications of withdrawals from different types of accounts and to plan accordingly to minimize tax liability.