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529 plans is not the best when it comes to financial aid

Todays Date: November 19, 2018

It’s all very good to begin with. A 529 plan provides you with tax-deferred opportunities to save up for your child’s education. The initial deposit you make in a 529 account comes from your pocket that is your income tax paid dollars. But, the money you thus invest in a 529 plan grows tax-deferred through channels set up by the state and yields same return of conventional mutual funds and bonds families tend to invest in.

But let’s face it. No matter how much we manage to save for the college education of out children, we still fall short in the end, considering the ever increasing education costs. So, the child is going to need financial aid in the end. Some say that the more you save up for your child’s education, the less would be the financial-aid he would be receiving. This is unfortunately true in the case of the 529 plan. Financial aid is awarded in the form of grants or subsidized loans and the amount of aid depends on the ‘financial need’ of the student. The total resources and family funding is deducted from the cost of attending college in order to calculate the financial need. This could effectively mean the 529 savings plan you have invested in would reduce the amount of financial aid dollar to dollar. Fortunately, it is not so. While there would be no dollar to dollar cut in the aid, there would be a deduction of up to 5.6% of the amount in 529 plan owned by parents. You might be surprised to learn that this is still good, because the deduction would be 20% if the account was owned by the student himself.

Further to this little problem, there is an added stipulation. While the earnings on your 529 account are tax-deferred and so is the distribution to the university, the earnings are still considered taxable when calculating the financial aid for the student. Supposing you invested $10,000 in your 529 plan and your earnings add up another $10,000. Now, if you pay $5000 in a semester’s fee, the 2,500 dollars in the amount which reflect earnings are considered as earnings of the student. This means that at a 50% assessment (assessment levels of student contributions are much higher than that of the parents) $1,250 is still deducted from the ‘financial need’ of the student in addition to the 5.6% (parents’ contributions) of the total money in the 529 account.

Despite all the confusion, we are still generally speaking here. There are many stipulations in the law as well as rules implemented by individual colleges that could defer the amount of financial need of a student. Also, it doesn’t mean that investing in a 529 plan is not a good option. While financial-aid is essential, you must realize that most of it is in the form of loans rather than grants. This means that you or your child will have to pay interest tomorrow, while you can earn interest today through a 529 plan. A careful assessment of your financial condition and the number of years till college will help you decide how much to invest in a 529 plan and how much to expect in aid. The bottom line is, of course, start saving now!

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