529s New York Times

Paying for College
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<p>The NY Times is offering a Q&A with Mark Kantrowitz of finaid.org. </p>

<p>Seeking</a> Your Questions on Financial Aid - NYTimes.com</p>

<p>People have been leaving some very interesting questions in the comment box. Here is one:</p>

<p>"Is it best that the student receiving some need-based aid take out loans initially, and not take distributions from the 529 account until the end of his/her college years, and then use those funds to pay towards the loans?"</p>

<p>From my understanding of what fin aid officers do, all of one's 529/coverdells are counted as being totally available on day one of college; no spreading it out. That will affect how much aid, such as subsidized gov't loans which have lower interest rates, is given initially. Is seems to me that if you have enough in 529s to spread out, you probably won't get the cheap loans. And if you take out pricey private loans that charge interest rates during the college years, it doesn't make sense to save the 529. Am I correct in my thinking?</p>

<p>I had hoped to be able to spread out our 529 but will probably need the whole thing in the beginning and also thought it was better to use up assets to begin with and put off taking out loans as much as possible. That way D should be eligible for more aid as she progresses in college. Thoughts?</p>

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<p>Actually,any money withdrawn from a 529 for eligible expenses (tuition, mandatory fees, room & board, books… and if I recall you can also use the money for a computer if necessary) must be spent in the calendar year that it is withdrawn. That means you can’t, for example, take out a student loan in 2011 for $5000, and then in 2015 withdraw the $5000 from the 529 and pay back the loan. If you did the expense and withdrawal will not be occurring in the same calendar year, so the withdrawal will be subject to taxes.</p>

<p>That’s my recollection, anyway. Others here with 529s can verify that.</p>

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<p>How is a 529 withdrawal reported on the FAFSA (amounts paid by others?) and how does a 529 withdrawal affect EFC?</p>

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<p>rent–very good point. I think you are correct. There are so many twists and turns with this stuff!!</p>

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<p>If it’s a student- or parent-owned 529, a withdrawal is not reported on FAFSA. If it’s money that comes from a grandparent- or other-owned 529 and paid for the student, it’s probably reported as an “amount paid by others”.</p>

<p>A 529 withdrawal is not income; it does not affect EFC, except to the extent that the money is no longer in the 529 for the next year’s reporting of assets (ie, assets are lower).</p>

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<p>The NY Times posted an answer to the question I started this thread off with and it sounds like you can pay off a loan at the end with 529 money. Although it also sounds to me like the question wasn’t answered. Here’s the complete Q&A:</p>

<p>Q.If a grandparent has some money in a 529 account for a student, will distributions taken from that account affect the student’s aid the next year? Put another way: Is it best that the student receiving some need-based aid take out loans initially, and not take distributions from the 529 account until the end of his/her college years, and then use those funds to pay towards the loans? How to use 529 accounts is, to me, a source of considerable confusion.</p>

<p>A. If a dependent student is named as a beneficiary of a 529 college savings plan that is owned by the student or the student’s parent, it is reported as a parent asset on the Fafsa. (It is reported as a parent asset, even if the 529 plan is owned by the student. This has a lower impact on aid eligibility than reporting it as a student asset.)</p>

<p>Otherwise it is not reported as an asset on the Fafsa.
If a 529 plan is reported as an asset on the Fafsa, qualified distributions from the 529 plan are not reported as income on the Fafsa.</p>

<p>If a 529 plan is not reported as an asset on the Fafsa, qualified distributions from the 529 plan are reported as untaxed income to the beneficiary on the subsequent year’s Fafsa.</p>

<p>So if the grandparent owns a 529 plan that names the student as a beneficiary, the 529 plan will not be reported as an asset on the Fafsa, but any distributions from the 529 plan will be reported as untaxed income to the student on next year’s Fafsa.</p>

<p>Untaxed income to the student has a big impact on aid eligibility, much more severe than a parent asset. There are several ways of addressing this problem.</p>

<p>One is to wait until the student’s senior year in college to take a distribution. Assuming the student won’t be continuing on with graduate or professional school, there will be no subsequent year in school to be affected by the distribution. Otherwise the grandparent could change the account owner to the student or parent so that it will be reported as an asset on the Fafsa.</p>

<p>This is a relatively recent change to the treatment of 529 plan distributions. The College Cost Reduction and Access Act of 2007 made this change effective starting with the 2009-10 school year. Several 529 plan web sites – including official web sites of state 529 plans – still contain old information.</p>