Good to Know
The juggernaut of student loan debt is a sad fact of life today for many families. But what if you could avoid or reduce student loan debt for you, your family and your clients?
If that sounds unlikely, join us as we dispel three common myths that just might lighten the debt load.
Three Myths Dispelled
As quick refresher, there are two broad types of 529 Plans, including College Savings Plans (Qualified Tuition Programs) and Prepaid Plans (Prepaid Tuition Plans). Our discussion focuses upon College Savings Plans because they are the overwhelmingly preferred method of saving for college. Treatment of Prepaid Plans follows some, but not all, of the requirements for College Savings Plans.
Myth - College Savings Plan Assets reduces student aid by 100%.
REALITY - As little as 0% will count against student aid eligibility.
- Less than 6% (5.62%) counts for plans owned by a custodial parent or dependent student.
- 20% counts for plans owned by an independent student.
- 0% counts for plans owned by a grandparent or anyone other than a parent or student.
Myth - College Savings Plan distributions reduce student aid by 100%.
REALITY - From 0% to 50% will count against student aid eligibility.
- 0% counts for qualified distributions from plans owned by a custodial parent, dependent student or independent student.
- 50% counts for qualified distributions from plans owned by virtually anyone else, such as grandparents. Interestingly, there is a two-year lag in the impact of these distributions. For example, qualified distributions from a grandparent-owned 529 College Savings Plan in the student’s sophomore year will not reduce student aid eligibility for the student’s sophomore, junior or senior year.
Myth - All colleges award student aid using the same federal formula
Reality - Colleges have discretion in calculating student aid eligibility, especially for scholarships, work-study programs and state-based student aid. Contact the college you are considering for more information.
The most effective way to maximize a student’s eligibility for federal student aid is generally to have the 529 College Savings Plan owned by the custodial parent (or dependent student).
A parent’s control of 529 College Savings Plan distributions is greatest when the parent is the owner. However, plans owned by a dependent student may be structured to have a Custodian, such as a parent, control the plan until the student reaches the age of majority.
Congratulations! You can now effectively dispel three common myths that can drive up student loan debt. In the spirit of giving you more than promised, here’s a little lagniappe (pronounced “lan-yap,” which means something extra):