How Colleges Consider 529 Plans in Need-Based Financial Aid

Reyna Gobel

The college investment accounts known as 529 plans can help families pay for college, but an account might end up working against a student when it comes to need-based financial aid.

But how much depends on a few key factors, including how much aid the student will get from federal grants versus institutional, or school-based, grants.

For instance, at the University of Nebraska--Lincoln, federal grants are the primary source of financial aid, says Craig Munier, director of the office of scholarships and financial aid at the school. They rely on what's known as expected family contribution, the number the federal government uses to determine a student's eligibility for programs such as Pell Grants.

That number, commonly referred to as the EFC, is derived from both the assets and the income as reported on a student's Free Application for Federal Student Aid. A specific EFC is required to get a Pell Grant, regardless of the school a student chooses to attend.

[Learn more about how savings can affect expected family contribution.]

"I've found the EFC is heavily connected to parent income," says Munier. "And parents with higher incomes tend to have more assets as well."

At Bellarmine University, a private school in Kentucky, the EFC is also used to determine financial aid eligibility, but the school has endowment money that is given out as scholarships, says Heather Boutell, director of financial aid for the university. The EFC is first subtracted from the total cost of attendance. Then, the remainder is generally paid for with a combination of scholarships, grants and student loans.

As long there is still need shown, a student could be awarded some need-based scholarship money. These scholarships aren't always awarded to the absolute neediest student, because other factors are also considered.

"We have many endowed scholarships here at the university. The donors stipulate the criteria for those funds, which oftentimes include a specific major, an academically gifted student or a student with financial need," says Boutell. "We use the EFC figure to determine financial need. So awarding is usually a review of the combination of the GPA, EFC and major, along with recommendations from faculty."

[Find out which schools claim to meet a student's full financial need.]

Not all assets will increase a family's expected contribution. "As far as 529 plans, they are included on the FAFSA, but there is an asset protection rate for parents, so all of that money doesn't count against them in determining the EFC," Boutell says. Families with an adjusted gross income under $50,000 won't have assets count in the calculation.

Some schools use a combination of the FAFSA and an aid application called the CSS/Financial Aid Profile by The College Board to evaluate financial aid eligibility, but income still plays the largest role.

Stanford uses the both to evaluate applicants' financial aid eligibility, said Karen Cooper, director of financial aid at Stanford University, via email. Parent assets are considered in the school's evaluation, but play a much smaller role than family income, she says.

[Set up a college savings timeline to help pay for school.]

In the college profile system by The College Board, not all family assets factor in, and the assets that are evaluated only count at a maximum rate for parents of up to 5 percent, said Susan McCrackin, senior director of financial aid methodology for The College Board, by email.

Both systems count student assets more than parent ones, so 529 plans or other assets owned by students can affect the numbers greatly. Experts say it's important for financial aid purposes that parents name their children as the person who can use the money, the beneficiary, but not actually give them ownership of the account.

The bottom line is that parents shouldn't avoid saving for college for fear of their child becoming ineligible for financial aid, since income is a much larger factor in the calculation -- but they should watch how much in assets are owned by the student.

Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.

Reyna Gobel is a freelance education reporter for U.S. News, covering college savings. You can follow her on Twitter or email her at