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How Virginia529 Affects FAFSA and Financial Aid Eligibility



How Virginia529 Affects FAFSA and Financial Aid Eligibility

Introduction: Busting the Myth

One of the most common fears for families saving for college is that their hard-earned money in a 529 plan will disqualify them from receiving financial aid. This fear is a major misconception that, for most families, is completely unfounded. The truth is, the impact of a 529 plan on financial aid is minimal, and the benefits of tax-free growth and reduced borrowing far outweigh any potential reduction in aid.

This guide will explain exactly how a 529 plan, using Virginia's Invest529 as a prime example, is treated on the Free Application for Federal Student Aid (FAFSA). You'll learn how recent, significant changes to the FAFSA have made saving even more beneficial.

Part 1: The Golden Rule of 529s on the FAFSA

The most crucial factor in determining how a 529 plan affects financial aid is who owns the account.

  • Parent-Owned 529 Plans:

    A 529 plan owned by a dependent student or their custodial parent is considered a parental asset on the FAFSA. This is the most favorable treatment. Under the FAFSA's Student Aid Index (SAI) formula, parental assets are assessed at a maximum rate of 5.64%. This means for every $10,000 in a parent-owned 529 plan, your student's aid eligibility will be reduced by, at most, $564. This is a very small number, especially when compared to student-owned assets, which are assessed at a much higher rate of 20%.

  • Qualified Withdrawals are NOT Income:

    One of the biggest benefits of a 529 plan is that when you make a qualified withdrawal to pay for college expenses, that money is not counted as income on the FAFSA. Income is assessed at a much higher rate than assets, so this favorable treatment is a significant win for savers.

Part 2: The Game-Changing FAFSA Simplification Act

A new law has completely changed the game for how certain 529 plans are treated on the FAFSA.

  • Before the Changes (Pre-2024-25):

    Prior to the FAFSA Simplification Act, withdrawals from 529 plans owned by grandparents or other relatives were considered untaxed student income on the FAFSA. This was a major problem, as student income could be assessed at up to a 50% rate, drastically reducing a student's eligibility for aid in the year following the withdrawal. This rule was a major deterrent for grandparents who wanted to help fund their grandchild's education.

  • After the Changes (2024-25 and Beyond):

    The FAFSA Simplification Act has eliminated this penalty. The new rules state that grandparent-owned 529 plans and their withdrawals are no longer reported on the FAFSA. This means grandparents can now contribute to a student's education without fear of negatively impacting their eligibility for federal need-based aid.

Part 3: The Exception to the Rule: The CSS Profile

While the FAFSA is the key to federal aid, it's important to know that some colleges use a separate form for their institutional aid.

  • What is the CSS Profile?

    The CSS Profile is a financial aid application used by hundreds of private colleges and universities, as well as some public universities. It is a more comprehensive form than the FAFSA.

  • How the CSS Profile is Different:

    The CSS Profile may require you to report assets that are not included on the FAFSA, such as 529 plans owned by grandparents or non-custodial parents. If your student is applying to a college that uses the CSS Profile, be sure to check their specific policies to understand how they treat these assets.

Part 4: Common Questions Answered

  • Q: Does a 529 plan affect merit scholarships?

    A: No. Merit-based scholarships are awarded based on academic, athletic, or other achievements, not financial need. The money you have saved in your 529 plan has no impact on a student's eligibility for these awards.

  • Q: How are 529 plans for multiple children treated?

    A: On the FAFSA, you only report the 529 accounts for the student who is applying for aid. Accounts for siblings are not included on the FAFSA, though they may be asked about on the CSS Profile.

  • Q: What about non-qualified withdrawals?

    A: It's important to use 529 funds for qualified educational expenses. Non-qualified withdrawals are not only subject to a 10% penalty on the earnings but are also considered taxable income, which could affect financial aid eligibility.

Conclusion: The Bottom Line

The benefits of saving for college in a tax-advantaged account like Virginia's Invest529 far outweigh the minimal impact on financial aid eligibility. For most families, the long-term tax-free growth and the freedom from future student loan debt are the ultimate goal.

By understanding how your 529 plan is treated on the FAFSA, you can save with confidence, knowing you are making one of the best financial decisions for your child's future.

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