I have 5,000 in my 529 plan. If I use all of that to pay for this year’s tuition will that affect my financial aid package?
Well, it certainly wouldn’t impact this year’s financial aid award, which will have been decided long before you make any payment.
It also wouldn’t have any negative impact on next year’s package. Assuming the funds were treated this year as a parent asset (as they should have been), next year’s financial aid forms will just reflect a $5k reduction in your parents’ assets. If they were instead treated as a student asset, next year’s forms would just reflect a $5k reduction in your assets.
The only exception would be if the 529 was being held for you by a relative other than your parents, which complicates things. if that’s the case, tell us.
No it’s by my parent, and it’s the end of it. Should I have it sent directly to the college or sent to us and then give it to the school?
Just withdraw the money and pay the school.
And keep a record of what you spend on tuition, fees, books & school supplies this year (the entire calendar year!) - you’ll need that later so you can tell the IRS that the 529 funds were spent on those expenses, and not stuff like room and board. And, no, you don’t have to account for every penny - it’s enough that your tuition, supplies, etc. were more than the amount of the 529 withdrawal.
I believe room and board is also a qualified expense for 529 plans.
Yes, room and board for an at least 1/2 time student are absolutely QEE for 529 and Coverdell distributions.
I also found out that the amount expensed from 529 should not exceed the room and board allowance listed in the college’s COA. This is good to know for when a student lives off-campus, and room and board are no longer billed through the college.
What does ‘expensed from 529’ mean?
^^ it means used 529 plan funds to pay for the expense. Some 529 plan administrators require a bill or receipts before issuing the funds, others put the responsibility on the owner of the account to keep track of all withdrawals and what they were used for.
Just curious - I see that the withdrawal form for the 529 plan I have for my son has the option of sending the money directly to the school. Is there any reason why I shouldn’t do this? It seems like the easiest thing and will make it easy to document that the money went for expenses.
Here’s a reliable article on taking 529 distributions including how to do it on page 2:
http://www.savingforcollege.com/articles/the-best-way-to-withdraw-529-funds
I have seen a post here on CC in the past where a school mis-allocated a direct 529 distribution as an outside scholarship and included the amount as a scholarships on the 1098T. So that poster had to get that straightened out with the bursar’s office. This possibility is mentioned in the article.
There is the possibility that the school never gets the disbursement or applies it incorrectly. If you have a lot of lead time you can follow up to make sure the check is issued from the fund and applied. If the account is in the parents’ name, you need to make sure the student’s name is indicated. The 529 fund may not have the student’s SSN, and the school may not track the payment correctly.
My daughter’s school has pretty much screwed up everything in her file, so if I had a 529 check going directly there (and I would make that selection if I had 529 money) I’d double check that the payment was received and applied correctly.
If you use all the money, it won’t affect your financial aid, because that amount probably didn’t work against you this year. At a FAFSA school, they ask if you have assets above around $30,000, so if you are below that, you would have answered NO. At a Profile school, they have an allowance for college savings so that people aren’t discouraged from saving anything. It’s well above the $5000 mark before they start dinging you.
“The only exception would be if the 529 was being held for you by a relative other than your parents, which complicates things. if that’s the case, tell us.”
Thank you for all the help here. Would you please address the complications? Grandparents have a 529 for each kid, one heading off next year, the other not for four years. We have a separate (different state too) 529 for each kid. In addition, we have a UTMA for each kid–I know, I know, awful, but set it up at kids’ births before 529 knowledge and opted not to liquidate due to taxes. My questions: Which do we draw down first? Second, even with all that, not enough for expensive schools because EFC at most schools around 34,000 a year (not including possible merit aid). If we use up the 529 plans first, then wouldn’t we have lower EFC/greater need for the last year or two of school? BTW, in state school not an option for many reasons. College bound junior is well qualified, missed NMF, 35 ACT, all the usual good stuff, plans on mechanical engineering. Thank you.
@perseverance1, one possible order for which accounts to draw on first. hopefully my details are right, this is just off the top of my head.
1 - UTMAs since they affect the EFC the most (20-40% of student’s assets apply directly to EFC depending on the school - a few schools like Penn are down in the 5% range but there are just a handful of them - research ‘consensus methodology’)
2 - 529 held by parent would be next
3 - 529 held by grandparent would be last since disbursements would be treated as income for the student and assessed at 50% when over the minimum threshold in determining EFC (threshold for student income is something like 6k/yr i think, before 50% of assets being assessed)
Thank you 