New Federal Financial Aid Treatment for 529 college savings plans

Effective July 1, 2006, the Higher Education Reconciliation Act (HERA) impacts federal student financial aid calculations as follows:
Qualified Education Benefit Impact on Federal Financial Aid
The term “qualified education benefit” is revised to encompass Coverdell ESA, 529 prepaid tuition plans and 529 college savings plans. Assets of a 529 college savings plan (and ESA) owned by a dependent student are excluded from the federal financial aid calculations.
 
NOTE: Moving assets from an UGMA/UTMA investment into a 529 college savings plan requires the investment be liquidated; capital gain may impact a student’s income for that tax year.
What it means to 529 plan investors:

  • If the 529 account is owned by the parent then a maximum of 5.6% of the asset could be deemed available in the financial aid calculation determining the family's expected contribution (EFC). NOTE: Withdrawals from the account to pay the beneficiary's education expenses are not counted as income to the student.

  • If the 529 account is owned by a dependent student, the asset is 100% excluded (not counted). NOTE: Withdrawals from the account to pay the beneficiary's education expenses are not counted as income to the student.

  • If the NextGen account is owned by an independent student, the asset is 20% available to the financial aid calculation determining the student's expected contribution (EFC). NOTE: Withdrawals from the account to pay the beneficiary's education expenses are not counted as income to the student. (Effective 7/1/07)

  • If the NextGen account naming the student as the beneficiary is owned by anyone else, then the asset is 100% excluded (not counted). NOTE: Withdrawals from the account to pay the beneficiary's education expenses are counted as income to the student.

Federal Financial Aid Treatment of Student Assets
Effective July 1, 2007 HERA changes the expected family contribution (EFC) calculation, impacting student financial aid eligibility as follows:
 
Dependent Students:

  • The income protection allowance for dependent students is changed from $2,200 to $3,000 (indexed annually thereafter). That means the first $3,000 of income earned by a dependent student is not included in the financial aid calculations.

  • The asset assessment rate for the expected family contribution (EFC) from non-qualified education benefits is reduced from 35% to 20%. That means approximately 20% of non-qulaified education benefit assets in the name of the student is considered in the financial aid calculations.

Independent Students:

  • The income protection allowance for a married student whose spouse is also enrolled in college is changed from $5,000 to $6,050 (indexed annually thereafter).That means the first $6,050 of income earned by an independent student is not included in the financial aid calculations.

  • The income protection allowance for a married student whose spouse is not enrolled in college is changed from $8,000 to $9,700 (indexed annually thereafter).That means the first $9,700 of income earned by a married student is not included in the financial aid calculations.

  • The asset assessment rate for the expected family contribution (EFC) for indpendent students is reduced from 35% to 20%. That means approximately 20% of the student's assets is considered in the financial aid calculations.