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How Fidelity 529 Affects Financial Aid: What You Need to Know



One of the most common reasons parents hesitate to open a Fidelity 529 plan is the fear of "penalizing" their child. The logic seems sound: if you save more money, the government will give you less financial aid.

However, as we move into the 2025–2026 academic year, the rules have changed in a way that favors savers more than ever before. Under the FAFSA Simplification Act, the impact of a 529 plan is often much smaller than families realize. Here is everything you need to know about how your Fidelity 529 interacts with financial aid.

1. The 5.64% Rule (Parent-Owned Accounts)

If you (the parent) own the Fidelity 529 and your child is a dependent, the FAFSA treats that money as a parental asset.

  • The Math: Only a maximum of 5.64% of the account's value is factored into the Student Aid Index (SAI).

  • The Reality: If you have $10,000 in a Fidelity 529, the federal government only expects you to contribute about $564 of that toward college per year. Your aid eligibility only drops by that small amount, while you have the full $10,000 available to pay the bill.

2. The "Grandparent Loophole" (The Biggest 2025 Change)

Historically, if a grandparent owned a 529 and paid for a grandchild's tuition, that money was treated as "student income," which could slash aid eligibility by up to 50%.

  • The New Rule: Starting with the 2024-2025 and 2025-2026 FAFSA, withdrawals from grandparent-owned (or relative-owned) 529 plans are no longer reported as student income.

  • The Strategy: This makes the Fidelity 529 an incredible tool for "The Village." Grandparents can now fund and spend the account without any negative impact on the student's federal need-based aid.

3. 529s vs. Other Savings (UGMA/UTMA)

If you are deciding between a Fidelity 529 and a standard custodial account (UGMA/UTMA), the 529 wins on financial aid every time.

  • Student Assets: Money in a student's name (like a savings account or UGMA) is assessed at 20%.

  • Comparison: A $10,000 UGMA account reduces aid by $2,000, while that same $10,000 in a parent-owned 529 only reduces it by $564. By choosing the 529, you "protect" more of your aid eligibility.

4. Siblings and the "Double-Counting" Myth

A major update for 2025 involves how the FAFSA looks at multiple children.

  • Only the Beneficiary Counts: Previously, if a parent had 529s for three different kids, the total value of all three accounts was reported.

  • The New Update: Now, you only report the 529 assets for the specific student currently filling out the FAFSA. This prevents your "total" family savings from artificially inflating the SAI for your first child to enter college.

5. CSS Profile Schools: The Exception

While the FAFSA is more lenient, about 200 elite private colleges use the CSS Profile to award their own institutional aid.

  • Deeper Dive: These schools may still ask about grandparent-owned accounts or sibling accounts. If your child is aiming for the Ivy League or top-tier private schools, the "grandparent loophole" might not be as wide as it is for federal aid.

Comparison: Impact on Financial Aid (2025–2026)

Account TypeOwnerFAFSA Impact (Max)Reported as Asset?
Fidelity 529Parent5.64%Yes
Fidelity 529Grandparent0%No
Savings/CheckingStudent20%Yes
UGMA/UTMAStudent20%Yes

The Bottom Line

In 2025, the "penalty" for saving in a Fidelity 529 is incredibly low. Because it is assessed at a much lower rate than student-owned assets—and because grandparent contributions are now "invisible" to the FAFSA—the tax-free growth and 2% cash-back rewards far outweigh the small reduction in aid.

Would you like me to help you estimate your Student Aid Index (SAI) based on your current Fidelity 529 balance?

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