<p>The treatment of 529's is a bit complicated. Cutting and pasting from two sources, below.</p>
<p>" * Section 529 college savings plans are treated as an asset of the account owner, and so have a low impact on financial aid eligibility. College savings plans are reported on the Free Application for Federal Student Aid (FAFSA) as an asset of the account owner, which is typically the parent. Distributions from a college savings plan have no impact on financial aid eligibility (i.e., they are not counted as untaxed income or a resource).
* Section 529 prepaid tuition plans are now treated as an asset and are reported on the FAFSA, just like section 529 college savings plans. The asset value is the refund value of the plan. Distributions have no impact on financial aid eligibility. This change went into effect July 1, 2006. (Previously they were treated as a resource, which reduced need-based financial aid 100%.) </p>
<p>A quirk in the legislative language in the Higher Education Reconciliation Act of 2005 causes the custodial versions of section 529 college savings plans, prepaid tuition plans, and Coverdell education savings accounts to be disregarded in need analysis. In other words, if the student is both the account owner and the beneficiary of one of these plans, the plan's value is not reported on the FAFSA. This legislative language drafting error is likely to be corrected by Congress, causing the custodial versions of the plans to be treated as though they were parent assets. (The President's FY2008 budget proposes changing the financial aid treatment of all 529 college savings plans and prepaid tuition plans to be disregarded entirely.) "</p>
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<p>"Financial aid implications of the 529s and Coverdells (pages 32-33, 97, 165, 171, 180)
As we went to press, there was some ambiguity about how student-owned prepaid 529 plans, 529 savings plans or Coverdell ESAs would be treated in the federal aid formula. (Remember that parent-owned prepaid 529s, 529 savings plans and Coverdells—in which the student is listed as the beneficiary, but not considered the owner—are treated in both the federal and institutional methodologies as part of the parents' assets.)</p>
<p>Now as a result of a clarification by the Department of Education, we can report more good news. For the purposes of the 2007-2008 as well as the 2006-2007 versions of the federal FAFSA form, student-owned 529s and Coverdells need NOT be reported as part of the student's assets provided the student is required to report parental information on the FAFSA. (Independent students will continue to need to report the value of any student-owned 529s or Coverdells on the FAFSA form as part of their assets.)</p>
<p>Keep in the mind that this treatment is only a policy interpretation by the U.S. Department of Education. Congress may still make changes in future year. So parents with dependent children should still be cautious about immediately transferring in custodial accounts (UGMAs or UTMAs) directly into a custodial 529 plan or designating that a Coverdell will be owned by the student upon reaching the age of majority—as this strategy to shelter these assets could backfire if Congress makes a technical correction to the law or enacts new legislation addressing this issue.</p>
<p>For the purposes of the 2007-2008 PROFILE form (which many private colleges require in order to award their own financial aid), the rules will be a little different. For students who must report parental information on the PROFILE form, student-owned 529 plans and Coverdells should be reported on the 2007-2008 PROFILE as part of the parent assets reported for PROFILE question PA-120. This means that instead of being assessed at the student rate of 25%, these funds can be assessed by no more than 5%.</p>
<p>These rules apply only to student-owned accounts of dependent students. If a parent owns the account with the student listed as a beneficiary, it continues to be a parental asset for the purposes of both the FAFSA and the PROFILE form. Be aware that student-owned 529 plans are not that common and are normally created when funds in a regular custodial account (UGMA or UTMA) are withdrawn and deposited directly into the 529 plan. However 529s can also be established as custodial 529s when the plan is originally funded, though such accounts somewhat defeat the purpose of using a 529 plan. Since the student gains control of the custodial 529 upon reaching the age of majority, there is no guarantee the funds will be used for education. Coverdell accounts may or may not become student-owned when the student reaches the age of majority, depending on how the account was originally established."</p>