How Will NC 529 Savings Plans Affect Financial Aid Awarded Through FAFSA?

Can you picture it? Your son or daughter all grown-up, dressed in a cap and gown, and striding across the stage to receive a high school diploma. It’s a thought that makes a parent’s heart fill with pride and emotion; your baby has made it through the early years and is now ready to take on future challenges!

With the excitement about this next big step comes the realization that college is a real investment. At least, unlike the purchase of a car that will depreciate, an education lasts a lifetime and can increase the likelihood of your child’s future success. Take a look at Five Ways Ed Pays for the benefits this can bring.

Whether your child is taking this next step soon or still has years to go, one of the best ways to be prepared for college is to start saving. While not many families can pay the full cost of college, they should expect to pay at least part. Going to College without Going Broke can help you understand how this works.

Since you’ll likely need to pitch in for the cost of college, take advantage of the opportunity to put money away for college in the NC 529® Plan. Earnings on the money you put away will be free of federal and North Carolina taxes as long as you use it to pay for your child’s qualified higher education expenses.

Of course, you may be wondering what impact your savings will have on your child’s ability to receive financial aid when the time comes. Money saved in an NC 529 plan is an asset and is currently included in the FAFSA’s calculation of the Expected Family Contribution. The amount of impact, however, depends on who owns the account, the parent or student.

If you are the Participant (owner of the account) on a 529 Account with your child as the Beneficiary, your account will be reported as a parental, not a student, asset on the Free Application for Federal Student Aid (FAFSA), This is beneficial because parental assets are counted at a lower rate (currently 5.64 percent) than student assets (currently 20 percent) in determining what your family will be expected to contribute for education.

If a grandparent also has or opens an NC 529 Account to help pay for college for your child, that’s great, but how and when withdrawals are made available to the child or parent can make a difference. When opened, an NC 529 Plan is the grandparent’s asset and, therefore, not included in the asset calculation when the potential beneficiary files the FAFSA. However, if the grandparent sends money from the account directly to the student or college, it will be included in the following year’s financial aid application as “untaxed income” and assessed at about 50 percent. If the grandparent instead sends money to the student’s parent at the time the aid application is submitted, it will increase the parental assets, but at least they will be assessed at the lower parent rate. Talking with a financial adviser about the best way to approach distribution may be helpful.

So what determines how much your family is expected to contribute? Read on.

Financial Aid 101

There are two types of financial aid — merit-based and need-based. Merit aid, often in the form of scholarships, is usually awarded on academic ability, sports accomplishment, or other special talent.  Need-based aid is determined by your financial circumstances and may be available as a grant or scholarship.

By completing the Free Application for Federal Student Aid (FAFSA) the year before going to college (application opens October 1 of the student’s high school senior year), your family can find out whether your child is eligible for state and federal need-based aid and what portion of college costs your family should be able to reasonably afford. Both you and your child must report income, assets and benefits on the FAFSA. Along with these items, other factors also are considered, such as number of children in college at the same time and the age of the older parent. Then standard formulas will compute what’s known as the Expected Family Contribution (“EFC”) — the amount your family should have available to pay for college.

Deducting the EFC from the Cost of Attendance (COA) at a college is what determines your child’s eligibility for need-based funds. COA includes tuition, fees, books and supplies, personal expenses, transportation costs, and, typically, room and board, and possibly child care. COA varies by college or university, so check the specifics at each school to which your child applies.

If the family has financial need, your child could be eligible for federal and state scholarships and grants and the colleges to which he or she applies. If need is demonstrated, most colleges will offer a financial aid package which usually includes grants and loans or work-study to help meet financial need.

The package offered represents the best effort of the school to meet need. Some schools can meet demonstrated need in full and others cannot. Think carefully how much loan and work is offered in comparison what is offered as grant or scholarship. As your child decides which college to attend, the financial aid award should be an important factor, but not the only thing to consider. Where will your child most likely be successful, fit in best, be able to reach his or her career goals?

The simple truth is that college likely will be a significant expense when the time comes. That’s why paying for a child’s education usually takes a mixture of savings, current income, grants, scholarships, work-study, and other financial aid. To help your child achieve his or her future dreams, prepare today by saving, and, when the time for college gets closer, help him or her explore scholarships and other financial aid options.