Does a 529 plan affect financial aid?
A 529 college savings plan can be a powerful tool when saving for future education expenses because investments in the plan can increase tax-free, but many savers don't take full advantage of all the benefits that 529 plans have to offer.
One common deterrent to investing through a 529 plan is the concern that assets in a 529 account will reduce financial aid eligibility. While it's true that 529 assets have an impact on financial aid, the effect is likely smaller than you think.
Do 529 plans affect financial aid?
The short answer is yes. An increase in the means to fund higher education naturally means the beneficiary is eligible for less need-based aid.
However, assets in a 529 plan have a lesser impact on financial aid packages than income does. A student's federal financial aid is based on an estimate of what a family can contribute annually from their income and assets. Income is the largest portion of this measurement of a student's ability to pay for college, which is represented by the Student Aid Index, or SAI, on the Free Application for Federal Student Aid, or FAFSA. The SAI replaced the expected family contribution, which was previously used on the application.
Typically, the SAI calculation expects parents to use 25% to 35% of their adjusted available income to cover college costs, though that number can go as high as 47%. Parental contribution from assets, including 529 account balances, is assessed at a much lower maximum of 5.64%. So, if a family has a 529 account with $10,000, this raises the expected family contribution by at most $564 and reduces the federal aid package by the same amount.
A 529 plan's impact depends on who owns the account
The impact of 529 assets on a beneficiary's financial aid package depends on who owns the account. As outlined above, if the plan is owned by the beneficiary's parent, then 5.64% of the account's value is considered in the SAI, which determines a student's financial aid eligibility on the FAFSA.
On the other hand, if the plan is owned by the student, then up to 20% of the account value may be considered in calculating financial aid eligibility.
With changes to the federal student aid calculation as part of the FAFSA Simplification Act that took effect for the 2024-25 academic year, 529 accounts owned by grandparents or other relatives are not considered student assets and won't impact the beneficiary's financial aid.
Siblings' 529 assets don't count for federal financial aid
After the FAFSA Simplification Act, assets in 529 accounts are counted as parental assets only for the beneficiary of the account. That means, if you have 529 accounts set up for your other children, the assets in those accounts are no longer counted toward the expected family contribution. As mentioned above, accounts owned by grandparents or other relatives will also be excluded from determining federal financial aid eligibility.
Financial aid eligibility differs between FAFSA and CSS profile
There are also schools that use the College Scholarship Service, or CSS, Profile (primarily private schools) to calculate their financial aid packages. The CSS Profile's formula to calculate aid differs from FAFSA's. For instance, the CSS Profile asks for all 529 accounts owned by the beneficiary's parents, whereas the FAFSA only counts 529 accounts for which the student is the beneficiary. Moreover, the CSS Profile is customized by the institution, so each school can have its own formula to calculate its aid packages. While each school that uses CSS Profile information applies its own standards, this calculator estimates what your family might be expected to pay.
___
This article was provided to The Associated Press by Morningstar. For more personal finance content, go to https://www.morningstar.com/personal-finance
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Yahoo
an hour ago
- Yahoo
Student loan debt: The different repayment options at your disposal
As student loan payments resume, here's what Americans should prioritize to manage their debt and create a financial plan to pay it off. Miller Student Loan Consulting President and student loan consultant Jan Miller comes on Wealth to speak more about payment plans and strategies Americans can adopt. To watch more expert insights and analysis on the latest market action, check out more Wealth here. All week, we're giving you everything that you need to know about paying back your student loans. There are so many options out there, but income-based repayment, standard fixed monthly installments, and even potential loan forgiveness are some of the main ones. So, how do you know which payment plan is best for you? Here to break it all down, we've got Jan Miller, the president of Miller Student Loan Counseling and Consulting. Great to have you here with us, Jan. So, what are the first things that you should do before you even start looking at potential payment plans? Immediately, you want to start and create your accounts for both the loan servicer and for federal student aid, which is going to be your, your, uh, FAFSA student Uh, and that's because you may have to use both of them. So, your loan servicer handles, uh, deferments, forbearance, payments. Uh, federal student aid is going to handle applications for income-driven plans and forgiveness programs. So, let's lay out a few key scenarios here, many borrowers may find themselves in. The first one, perhaps, if you have federal loans, and you work for a non-profit or government agency, what payment plan might be best for you? Yeah. So right now, of course, a lot of change with payment plans, uh, due to the new, uh, the recent court injunction on the save program, and, uh, of course, the new Republican bill coming. However, the income-based repayment plan, uh, is likely going to be the best option for public service loan forgiveness. And whenever you hear the term income-driven repayment, that refers to all plans, SAVE, PAYE, REPAYE, ICR, IBR. The one that you want is income-based repayment because that one you will, uh, certainly qualify for if your income is low enough. Now, what if you have federal loans, and you owe way more than your annual income? Right. So if you don't work for a nonprofit, you still want to pursue income-driven plans because your total out-of-pocket costs, even if you're considering potential tax consequences of the forgiveness at the end, is still going to be less if you make payments, lower payments based on your income, until the loan is forgiven. Which forgiveness is still a real thing under that program. Uh, additionally, uh, it's going to increase your cash flow in the real time. So your payment's going to be lower. So you get to have your cake and eat it too, a lower payment, and lower total cost on the loan, um, if your, your debt is that much more than what you make yearly. Now, what about someone with federal loans, but their income makes payments pretty affordable? Well, you know, again, if your credit's good, and you're in a good position financially, uh, and you can afford your monthly payments, you can afford, you know, a payment of around 1% of what your balance is, then you want to consider a refinance, uh, and paying the loan in a more traditional sense at that point, because you hopefully can get a better interest rate, especially as, uh, inflation cools. So, there is this scenario as well, if a borrower has just private loans. What are the options there? Just private loans, first of all, it's going to depend on your lender, right? So if you have Sallie Mae, they're going to be more flexible. Uh, they have, uh, a greater amount of forbearance. They have rate reduction and term extension programs that you can apply for. Um, and they'll usually, um, have, uh, additional options for you. And of course, one of the tricks is, if you, if you can't get any help from customer service, let the account go a few days past due, and the collections representatives will have a greater amount of authority to give you options if you have to do that. They don't report to credit until you're 45 days. You can avoid that. Um, if you have other, uh, you know, like, um, other lenders such as Citibank, or, uh, Citizens Bank, those type, you have less options. It's more like a traditional loan that you're going to owe a bank. And, uh, if you can refinance it, that's fine, but, um, we often say in the office here that if you qualify for refinance, you probably don't need it, or have a student loan problem. If you have a problem, then you probably don't qualify for it because it'll show up in your financials. But if you can refinance, do it. If not, you're going to be stuck with that payment, um, unless in severe, or, you know, last resort situations you can't afford your payment. At which point, then, you can try and negotiate settlements, or, uh, try and work out, uh, temporary payment arrangements, uh, with the lender themselves, but your options are more limited. Sign in to access your portfolio
Yahoo
a day ago
- Yahoo
What is student loan refinancing and how does it work?
Student loan refinancing means taking out a new loan to pay off one or more current student loans. It can provide a lower interest rate, extend your repayment timeline or make your monthly payment more affordable. Refinancing is only available through private lenders, and you lose key benefits when you refinance federal student loans. Student loan refinancing is when you apply for a new loan to pay off your current student loans. Low student loan refinance rates and the potential for smaller payments can make it an attractive option. Refinancing isn't always the best move – and if you have federal student loans, it means giving up valuable benefits. Understand the process and potential risks before making a decision. Use Bankrate's student loan refinance calculator to see what your new monthly payment could be and determine if refinancing is the best option for your budget and goals. Crunch the numbers Refinancing isn't always the best option. While you can refinance federal student loans, you'll be consolidating them into a private loan and to go through the process of getting a new loan. For Bankrate Senior Editor Courtney Mihocik, refinancing her federal loans wasn't a good option. Mihocik was also hoping for another benefit that was, at that time, seemingly possible with federal loans — mass forgiveness. Of course, we're seeing now that forgiveness is unlikely under the Trump administration, but it was something Mihocik considered when deciding what loans to refinance. Learn more: Student loan forgiveness is not over Does refinancing help you meet your goal of lowering your monthly payment, extending your term or better managing your student loan debt? Do you meet the eligibility requirements for student loan refinancing, including a strong credit score, stable income and minimum required loan amount? Would using a cosigner help you qualify for the loan or get a lower rate or better terms? If you're refinancing federal student loans, are you comfortable losing such benefits as income-driven repayment plans and potential loan forgiveness? Are there alternative options that may work better in your situation? Student loan refinancing consolidates multiple student loans into a new private loan with one interest rate and monthly payment. That means you'll need to go through the application and approval process like you did for your current student loans. If you're refinancing federal student loans, the process will be different since you'll be applying for a private loan this time around. You won't need to fill out the FAFSA, and your credit profile will be taken into consideration for your new loan. Once you decide that refinancing is the best option, follow these steps to refinance your loans: : You'll want to compare lenders since will have different offers. Prequalify with a few different lenders to get the rates and terms based on your specific credit score and loan. Submit an application: Fill out an application online or in person, depending on the lender you choose. You'll need information about your finances and your current loans, as well as your personal contact information. Mihocik recommends having your account numbers from your original lender handy. You may also be asked to provide certain documents, like your license, bank statements and W2s. Transfer payments to your new lender: Your new loan will pay off the balances of the old loans you consolidated under the refinance. Make sure that you get confirmation from your previous lenders that the account was paid and closed. Begin repayment on your new refinance loan: Once you're approved for the loan, and it pays off your existing student loans, you'll begin paying off your new refinanced loan. Mihocik didn't experience any drawbacks to refinancing her student loans: 'I refer to it as the best decision of my early twenties,' she says. But for some borrowers, student loan refinancing isn't a one-size-fits-all solution, and it may not even be the best option. It's important to realize when it would help reach your debt-payoff goals and when it could hinder them. Borrowers with high interest rates on private loans are the best refinance candidates because they have the potential to save the most money. Even without a better rate, refinancing to a shorter term can also help you save overall — even though you'll have a higher monthly payment. Here's an example of how your savings would break down if you refinanced to a lower rate or kept the same rate but refinanced to a shorter term. Key points Original loan Refinanced to lower rate Refinanced to shorter term Amount $50,000 $50,000 $50,000 Interest rate 12% 6% 12% Term 10 years 10 years 5 years Total interest paid over loan term $36,082.57 $16,612.30 $16,733.34 Other situations where refinancing student loans may be a good idea: You have trouble managing multiple loans and want to combine them into one. You're having trouble affording your large monthly payments and can extend your payment term. You want to release your cosigner from an existing loan. You have a higher income or better credit score than when you took out your original loans. By refinancing with Earnest, Mihocik was able to choose her term based on how much she wanted to pay each month and refinanced into a repayment term that allowed her to pay off her loans five years earlier than her original payoff date. She was also able to set up biweekly payments, which allowed her to squeeze in an extra full payment each year, cutting her payoff time even further. Borrowers with federal student loans, in particular, should think carefully about the drawbacks because they could lose such benefits as loan forgiveness, income-driven repayment options and forbearance. Reasons to think twice about refinancing: You're offered a higher interest rate than what you're currently paying. You're offered a longer repayment term than your current loan term and can afford your current monthly payments. You're near the end of your loan term and the loan will soon be paid off. Refinancing student loans can have a positive impact on your credit score or a negative one, depending on how you manage your loan. Here are the factors that affect your credit score: Payment history Credit utilization Length of credit history New credit The two biggest factors are payment history and credit utilization. Consistent, on-time payments for at least the minimum required payment show that you're a responsible borrower while a low utilization ratio shows you're successfully managing the debt you have. Other factors that affect your credit score are length of credit history and new credit. An established credit history shows you have experience with borrowing and managing debt while new inquiries may signal you're in need of credit and may pose a risk to lenders. Refinancing your student loans gives you the opportunity to increase your score by building a strong payment history and lowering your credit utilization. It's easier to manage one loan payment than several, helping you make payments on time. You may be able to lower your monthly payment, making it easier to meet the required payment each month. It may pay your loan down faster, which might help lower your credit utilization ratio. Refinancing will temporarily lower your score, but if you do the right things, it can recover relatively quickly. On the other hand, if you mismanage your new loan, you can hurt your credit score. A hard credit check is required to qualify you for the loan, which can cause a temporary dip in your score. You'll be replacing older debts with a new loan and closing those older accounts, reducing the average age of your credit. If you miss any payments on your new loan, your score could drop significantly. If you believe refinancing is right for you, compare rates, terms and fees from as many lenders as possible. Student loan refinancing can help some borrowers save money by allowing them to swap out their existing loans with a lower rate on a new private loan. That said, it's not the right choice for everyone. If you have federal student loans, consider that refinancing means giving up access to benefits like federal forbearance and student loan forgiveness programs. How often can you refinance student loans? There's no set limit to how often you can refinance your student loans, but if you refinance too often, it can hurt your credit score. When you apply for a private student loan, a lender usually performs a hard credit check to assess your credit health, which results in a temporary ding to your credit score. When is the best time to refinance student loans? The best time to refinance depends on several factors, such as your credit score and income. Refinancing could be a good idea if you have a steady income and your credit has improved since taking out your original loan. It can also be a good idea when student loan interest rates are lower than your current loans' rates. How is student loan refinancing different from student loan consolidation? Student loan refinancing and consolidation may sound similar, but they are different processes. Refinancing a student loan involves taking out a new loan from a private lender to pay off one or more of your current loans. Both private student loans and federal student loans are eligible for refinancing. Student loan consolidation is only available to federal student loan borrowers via the Direct Loan Consolidation program provided by the Department of Education. You replace one or more existing federal loans with a single federal loan.
Yahoo
a day ago
- Yahoo
Federal vs. private student loans: What borrowers should know
Many student loan borrowers may not realize how different federal and private loans can be when it comes to repayment. Student Loan Servicing Alliance executive director Scott Buchanan explains what to know about repayment plans, budgeting strategies, and how to handle loans in default. To watch more expert insights and analysis on the latest market action, check out more Wealth here. While student loans offer a grace period for repayment, you will usually eventually have to pay them back. Yeah. All week, we're giving you everything that you need to know about paying back this money. And today, we're breaking down the difference between paying off federal and private student loans. For that, we have Scott Buchanan, who's the Student Loan Servicing Alliance Executive Director. Scott, good to have you here with us. So let's start by explaining the difference between federal and private loans. Yeah. Thanks, Brad, for having me. Um, yeah, the difference is primarily is who is the lender. Um, federal student loans are lent directly by the federal government using money from Treasury. And private education loans are generally made by banks or other financial institutions, um, using sort of a private credit. Um, they're very similar in private education loans to other consumer credit like credit cards or mortgages or things like that where there are there's a test of credit worthiness, um, that that the lender will make. Um, as opposed to the federal student loan program where generally, it's a federal entitlement, and so if you're going to school have filled out the FAFSA, then you're entitled to get those loans. How should borrowers approach federal loans? Listen, federal loans are incredibly flexible in terms of your repayment options. You need to know what kind of loan you have. Do you have a unsubsidized loan? Do you have a plus loan or things like that, um, because they can have different benefits. But there's a lot of options, including forbearances, deferments, income-driven repayment plans, um, that can all dramatically adjust your monthly payment amount. Um, so something you need to always look at is the total balance of your loans and thinking about even when you're in school and thinking about potential repayment, remember you're going to have to borrow the course of two or four years. Um, and think about that in your repayment options. What about private loans? When should borrowers consider applying for them? Listen, you should always apply for these loans as early as possible. Once you get your federal financial aid award letter from your institution, talk to the financial aid office. Make sure you've maximized any institutional aid, um, that you can possibly get that would reduce the amount you have to borrow. Figure out how much federal loan ability you have, and then determine what your gap is going to be because the federal loans may not cover all your costs, and that's when you might turn to private education loans. And doing so earlier is better because you can shop around on private education loans and find a lender, um, who's got the best offering for you in terms of an APR, um, and the best sort of program options that are available under that loan. So what should the plan of attack be for repayment? Yeah. Well, listen, make a budget like all financial things. Um, you need to know in advance, like that's sort of the advantage of of of, you know, sort of going to school and having this period of time generally when we don't have to make repayment. You have plenty of time to put together sort of what your plan of action is going to be when you graduate and leave. Um, so, you know, number one, don't overborrow in the first place, as I always say. Um, but if you have already borrowed, um, then make sure that you sit down, figure out each monthly payment that you're going to have, the differences between your federal and your private loans because they're going to all have different monthly payments, different interest rates, um, and then put together a budget, a plan of action about how you're going to do it. If, remember, when you first graduate, your income is likely to be a lot lower than it will be in the future, that's when you need to talk to your federal loan servicer and say, hey, here's my financial situation on the federal student loans. How can I lower my monthly payment or how can I meet this this budget that I have today? And they're going to have a lot more options, whereas on the private loan side of things, um, it's going to be relatively set about the monthly payment. If your loan has gone into default, what are the steps that you should start to take to make sure that you get back into good standing? Yeah. Well, that's very different between federal and private loans as well. But on the federal student loan, um, once you reach 270 days delinquent, your loan can go into default. And that's when you need to call the Default Resolution Group at the Department of Education. Um, they will reach out and let you know that you're in default, and your servicer will as well. Um, but that's who you need to talk to. There are lots of options, including rehabilitating the loan, potentially consolidating the loan, um, because getting out of default, um, is something that you definitely want to do. And that's why loan rehabilitation would probably be your best bet on federal student loans because that removes that default from your credit history. On private education loans, it's different, and that's why you need to be very mindful about keeping on top of those private education loans because once they go into default and charge off, there's not a whole lot you can do other than sort of negotiate a settlement or potentially a repayment plan, um, to try to resolve the total amount of that debt. And so once you have finally gotten to the point where you've fully paid off your student loans, then at that point, how are you kind of able to take advantage of other tax advantages as well that you should be making sure that you're also reporting? Sure, absolutely. Uh, there's a there's a federal interest deduction on on student loans that you can take advantage of potentially. Now, that is tied to income. Um, so, you know, the higher income you are, the less likely are you to be able to take that benefit. But you should definitely during all of your repayment make sure that you're uh that you're uh as you're doing it in TurboTax or working with your accountant, make sure that you calculate the amount of interest that you pay. You'll get a statement from your loan servicer, just like you get W-2s and other things, um, from uh from your employer, and they will tell you how much interest may be eligible, and you should definitely take advantage of that. Scott, thanks so much for taking the time and breaking this all down.
