My DS (a junior) is the beneficiary of two 529 plans, I am the custodial parent and I have a 529 for him, and his father - the non-custodial parent has one for him as well. The non-custodial 529 has a lot more fund in there than mine, since that is the one that was started 17 years ago.
I read that non-custodial 529 is not reported on FAFSA, but when the money is withdrawn to pay for college, that money is treated as DS’s income, not parental asset. That means it will be counted as EFC and reduce his financial aid.
Can you please confirm if my understanding above is true?
If I knew what I know now I would have made different divorce arrangements and had the account in my name. But since we still are a year away, I may arrange to have that 529 plan transferred in my DS’s name which is counted as parental asset on FAFSA.
I thought 529 accounts in the student name were treated in the same way as parent assets…for fafsa purposes that would be 5.6% of value.
I thinkmthe amount paid on yoirmsons behalf is just that…money paid on his behalf. It’s not an asset. There is a line on the fafsa for money paid on his behalf.
If the 529 owner cannot be changed, then declare the withdrawals in the part of the FAFSA that is for bills paid on the student’s behalf by someone who is not listed on the FAFSA. And yes, bills paid by others will not reduce the custodial parent contribution before the student qualifies for aid. You do not have to declare it as an asset unless you are the owner.
The FAFSA assumes “next year looks pretty much like the one on the FAFSA” so if the noncustodial 529 runs out of money, you may need to do a financial aid appeal.
None of the above may matter as much at a Profile school that counts the noncustodial parent assets and income every year.
@thumper1 that is my understanding as well. From what I read, having a non-custodial parent 529 plan is a bad idea. It should be transferred (if possible) to either the custodial parent or the student itself, which will be counted as parental asset on FAFSA.
Distributions from a 529 account owned by a non-custodial parent, for the benefit of the student, must be reported on FAFSA item 45.j. as untaxed income received by the student. The balance of such a 529 account is not reported as an asset on FAFSA.
Changing the owner of a 529 account depends on the plan’s rules. Some plans allow it, some don’t.
@BelknapPoint thank you so much! Say if the 529 plan allows ownership transfer, should it be transferred to a custodial parent or the student? I’ve read conflicting information on whether or not the student ownership would mean the fund is counted as student asset of student untaxed income.
First of all, ownership change must be initiated by the account owner (in this case, the non-custodial parent). For FAFSA purposes, a student-owned 529 account is always counted as a parent asset. The distributions from a student-owned 529 account for the benefit of the student are not reported as income on FAFSA.
Whether the ownership of a 529 account is transferred from a non-custodial parent to the student or to the custodial parent will depend on many factors. Whoever becomes owner of the account will be able to do whatever he or she wants to do with it. If I was the owner who was being asked to transfer the account, this would give me some pause.
@BelknapPoint I understand. I don’t want to have to ask DS’s father to transfer ownership to me for fear he will see it as a trap and put up a fight. That is why I want to know if giving DS the ownership will also take the same effect, i.e. it is considered as parental asset, not DS’s untaxed income. I think DS’s father will be much more inclined to agree to ownership transfer to DS.
Student owned 529 always counts as a parent asset for FAFSA purposes. That is what @BelknapPoint wrote.
So if your son is the owner of this 529, it will still be assessed as a parent asset for FAFSA purposes…at 5.6% of value…not the 20% a student asset would be.
Remember…the current owner (non-custodial parent) really has control over this account right now…and may want it to remain this way.
What benefit do you think there is to changing the ownership of this account?
Is there enough money in the 529 you control to pay for the first and second year of college? If so, if the other 529 plan is not used until junior year, after filing the FAFSA for the final year, it will not need to be reported at all.
@thumper1 the benefit is exactly what you pointed out above: “So if your son is the owner of this 529, it will still be assessed as a parent asset for FAFSA purposes…at 5.6% of value…not the 20% a student asset would be.”
If the account ownership remains with his father, the non-custodial parent, the distribution from that account will be assessed at 20%.
@twoinanddone I know what you mean. My 529 does not have enough money to last 2 years - unless it is an in-state school but even that is a bit of a stretch. I set up that account for DS after the divorce. The other 529 was set up when my son was born in 2000, so it’s got a much bigger nest egg in it.
Will your child get enough aid based on FAFSA to make a difference? If the school is CSS, the 529 will be included anyway. If FAFSA and the amount is included in ‘other amounts paid on student’s behalf’, it is only going to be the amount paid, not the amount in the entire 529 account so it may not be that much different if the entire account is assessed at 5.6% of 1/4 of it is assessed at 20%
So much depends on the FAFSA situation - income, other assets, number of students in college.
@mommdc Honestly I have not even thought of that. I just assumed most schools require FAFSA only. How do I find this out? Is there a site that lists these facts or do I need to get on the website for every school? Thanks for the response btw!
@twoinanddone Very good points! I haven’t thought of it that way.
I am not familiar with CSS profile. I just started this college planning journey as DS is my first child, so I am very inexperienced. It sounds like CSS will consider income and assets of non-custodial parent? Is that right? Clearly I have more homework to do!
Look on the college websites in their financial aid sections. They will tell you what forms are required to apply for financial aid.
If the school requires the Profile or its own form…you might be doing this dance for NO good reason.
Most colleges don’t meet full need…so you may be doing this all for no net gain.
Your income will be the primary driver in all of this…and if it’s above a certain level (and you DO include child and spousal support on the fafsa), you may be doing this all for NO net gain.
@BelknapPoint if the money remains in the former husband’s name…isn’t the ONLY thing that is listed on the FAFSA the amount he contributed toward college costs?
What would BE the point in switching to the son?
Of course…if this is a Profile school…it won’t matter who owns the 529.