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A can be a powerful tool when saving for future education expenses because investments in the plan can increase tax-free, but many savers don鈥檛 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鈥檚 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 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鈥檚 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鈥檚 ability to pay for college, which is represented by the Student Aid Index, or SAI, on the , 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鈥檚 impact depends on who owns the account

The impact of 529 assets on a beneficiary鈥檚 financial aid package depends on who owns the account. As outlined above, if the plan is owned by the beneficiary鈥檚 parent, then 5.64% of the account鈥檚 value is considered in the SAI, which determines a student鈥檚 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 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鈥檛 impact the beneficiary鈥檚 financial aid.

Siblings鈥� 529 assets don鈥檛 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鈥檚 formula to calculate aid differs from FAFSA鈥檚. For instance, the CSS Profile asks for all 529 accounts owned by the beneficiary鈥檚 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 estimates what your family might be expected to pay.

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This article was provided to The Associated Press by Morningstar. For more personal finance content, go to鈥�