Your family has saved diligently in a 529 plan for years, yet when you sit down to complete the FAFSA for 2026-2027, anxiety creeps in – will those hard-earned savings penalize your student’s financial aid eligibility? I know this worry because families across Texas face this exact dilemma when they discover that college savings can affect aid calculations.
Here’s what most families miss about how 529 plans affect FAFSA: ownership structure determines how the account gets assessed in aid calculations. The simplified FAFSA that debuted for 2024-2025 created opportunities that many families overlook, particularly regarding grandparent-owned accounts and sibling 529 plans. Understanding these rules transforms anxiety into strategy.
Understanding FAFSA and Your Financial Aid Calculation
The Free Application for Federal Student Aid determines how much federal assistance your student qualifies to receive. When you submit the FAFSA for 2026-2027, the formula analyzes your family’s financial information to calculate your Student Aid Index. The SAI replaced the Expected Family Contribution starting with 2024-2025, representing what the government assesses your family can reasonably contribute toward college costs annually.
Colleges subtract your SAI from their total Cost of Attendance to determine your financial need. A $30,000 SAI at a school with $60,000 annual costs means you have $30,000 in demonstrated financial need that can be met through federal grants, work-study, subsidized loans, and institutional aid.
The simplified FAFSA reduced questions from 108 to 36, but this created confusion about asset reporting. The form excludes retirement accounts, your primary residence equity, and small family businesses. It does count cash, checking and savings accounts, taxable investments, real estate beyond your primary home, and education savings accounts designated for the student applying. How these assets affect your SAI depends entirely on ownership.
How the FAFSA Treats 529 Plans
Asset ownership determines everything when calculating FAFSA impact. Parent-owned, student-owned, and grandparent-owned 529 plans each affect aid eligibility differently.
Parent-Owned 529 Plans
When you own a 529 plan with your child as beneficiary, the FAFSA treats it as a parental asset assessed at a maximum rate of 5.64% of the account value. A $50,000 529 increases your SAI by roughly $2,820, potentially reducing aid eligibility by approximately that amount annually.
Here’s a major change from pre-2024 rules – you only report parent-owned 529 plans designated for the student completing the FAFSA. Sibling 529 accounts you own for other children are excluded from the calculation. This represents a significant improvement over previous FAFSA rules that required reporting all parent-owned 529 plans regardless of beneficiary. A family with $30,000 in a 529 for the applying student and $60,000 combined in 529s for two younger siblings now reports only the $30,000 account.
Parent-owned 529 distributions receive favorable treatment. Withdrawals to pay qualified education expenses never count as student income on subsequent FAFSA applications. Compare this to student employment, where 50% of earnings above a protection allowance count toward SAI calculation.
Student-Owned 529 Plans
When the student owns the 529 – typically because funds originated from a UGMA or UTMA custodial account – the account is assessed at 20% of its value. That same $50,000 account increases SAI by $10,000 instead of $2,820, potentially reducing aid eligibility by over $7,000 more than parent ownership. Ownership shown on the 529 statement – not beneficiary status – determines FAFSA reporting.
Grandparent-Owned 529 Plans
The FAFSA simplification delivered the biggest win here. Grandparent-owned 529 plans have zero impact on FAFSA – the account isn’t reported as an asset, and distributions aren’t reported as student income. Previously, distributions counted as untaxed student income and could reduce aid by up to 50% of the distribution amount. This change makes grandparent 529 contributions incredibly effective for helping with college while preserving aid eligibility.
In 2026, grandparents can contribute up to $19,000 per beneficiary annually without gift tax implications, or $38,000 for married couples. Using the five-year superfunding strategy, grandparents can contribute up to $95,000 ($190,000 for couples) at once and elect to treat it as five years of annual gifts.
The same favorable treatment applies to 529 plans owned by aunts, uncles, non-custodial parents, or any other relatives besides the custodial parent filing the FAFSA.
Other College Savings
Regular savings accounts and taxable investments count based on ownership – parent-owned receive 5.64% assessment while student-owned face 20%. UGMA and UTMA custodial accounts always count as student assets even though parents serve as custodians. Converting custodial accounts to custodial 529 plans before filing FAFSA shifts them from student to parent asset treatment.
Strategies to Minimize How 529 Plans Affect FAFSA
Timing, ownership structure, and withdrawal sequencing affect how much college savings reduces aid eligibility.
Optimize account ownership before filing. If your student owns a 529 or custodial account, consider transferring ownership to a parent where legally permitted. Converting a 20% assessed student asset into a 5.64% assessed parent asset often increases aid more than any administrative costs.
Coordinate grandparent distributions strategically. Since grandparent 529 accounts don’t affect FAFSA, grandparents can contribute and distribute funds anytime without reducing aid. Use parent-owned 529 funds for the student’s final year when remaining aid eligibility matters less, while relying on grandparent distributions earlier.
Time asset liquidations around FAFSA deadlines. The FAFSA captures assets as of the filing date. Paying tuition bills directly before filing reduces reportable cash assets. Paying a $15,000 tuition bill before filing means reporting $15,000 less in cash, decreasing SAI by roughly $850.
Spend student assets before parent assets. When both resources are available, spend student assets first since they face 20% assessment versus 5.64% for parent assets. Depleting higher-assessed accounts earlier maximizes remaining aid eligibility in subsequent years.
Consider 529-to-Roth IRA rollovers for excess funds. Starting in 2024, federal law permits rolling up to $35,000 lifetime from a 529 into a Roth IRA for the beneficiary under SECURE 2.0. This removes excess funds from future FAFSA calculations while providing retirement benefits, though a 15-year holding period requirement on the 529 account and a five-year rule on contributions apply.
Planning for Merit vs Need-Based Aid
Merit scholarships ignore your 529 balance completely – these awards, based on achievement, don’t consider family finances. Need-based aid follows different rules where your financial profile determines eligibility, and 529 savings affect the calculation.
When Merit Aid Dominates
Families with household incomes exceeding $150,000 typically receive minimal federal need-based aid regardless of 529 savings. For these families, merit aid likely provides more funding anyway. High-achieving students attending schools where their stats place them in the top 25% of admitted students can expect significant merit awards that exceed any need-based aid they might have qualified for with lower savings.
Higher-income Texas families may benefit from maximizing 529 contributions without concern for aid impact. Tax-free growth benefits can exceed any minimal need-based aid preserved by keeping savings in taxable accounts instead.
When Need-Based Aid Requires Balance
Families with incomes below $100,000 face more significant need-based aid eligibility, making 529 impact worth considering. A family earning $75,000 with $80,000 in 529 assets might see savings reduced by roughly $4,500. However, keeping that money in taxable investments doesn’t eliminate FAFSA impact – those assets still count. The question becomes whether 529 tax advantages justify the same aid impact you’d face anyway.
Multi-Year Planning
Financial aid isn’t a one-time calculation – you file FAFSA annually. A 529 with $60,000 freshman year drops to $45,000 sophomore year after paying first-year expenses, improving aid eligibility. This progressive improvement means aid impact decreases each year as you spend funds on education. Strategic families manage this by frontloading 529 distributions in years when aid eligibility matters less.
Common Mistakes to Avoid
Most FAFSA errors stem from confusion about ownership and reporting requirements.
- Reporting parent-owned 529s as student assets. Your child is the beneficiary, but you’re the owner. Report as a parent asset. A $50,000 account reported as a student asset increases SAI by $10,000 versus $2,820 as a parent asset, costing thousands in aid eligibility.
- Reporting sibling 529 accounts. Under current FAFSA rules, you only report parent-owned 529 plans designated for the student completing the application. Do not include 529 accounts you own for other children. This changed with the simplified FAFSA – previously, all parent-owned 529s required reporting regardless of beneficiary.
- Confusing custodial 529s with regular ownership. Custodial 529 accounts remain student assets despite your control. Check statements to identify ownership type.
- Reporting grandparent distributions. Grandparent 529 withdrawals don’t appear anywhere on the current FAFSA. Don’t report them as income.
- Reporting 529 distributions as income. Qualified withdrawals from parent or student-owned 529s never count as income when used for education expenses.
- Including retirement accounts. The FAFSA excludes 401(k)s, IRAs, and home equity. Don’t report these assets.
- Filing before optimizing assets. Once submitted, correcting asset values becomes difficult unless you made an actual error. Review your financial position before filing.
- Liquidating 529s to avoid reporting. Withdrawn funds either remain as reportable cash or trigger taxes and penalties. The 529’s tax benefits and modest assessment far exceed these costs.
- Avoiding 529 saving due to aid concerns. Regular savings still count as assets. Forgoing 529 tax benefits over 10-15 years costs tens of thousands in lost growth.
Building Your College Funding Strategy with Confidence
The FAFSA impact of 529 plans matters less than most families fear. A 5.64% asset assessment on parent-owned accounts means your diligent saving reduces aid eligibility modestly while providing tax-free growth that typically exceeds any aid reduction over time. The families who save nothing face their own penalty – full-price college costs without accumulated savings to bridge the gap between aid packages and actual expenses.
Start by verifying the ownership structure on all your college savings accounts. Parent-owned 529s provide the most favorable FAFSA treatment while still offering maximum tax benefits. If your student owns accounts through custodial arrangements, explore whether ownership transfers make sense before filing FAFSA. Coordinate with grandparents who want to help – their 529 contributions and distributions now offer powerful aid-neutral funding that previous rules penalized severely.
Review your target schools’ specific aid requirements beyond FAFSA. Public Texas universities rely primarily on federal aid formulas, but private schools often require the CSS Profile with different asset treatment. Understanding each institution’s approach helps you optimize asset positioning appropriately rather than planning for one scenario that doesn’t match your student’s actual college list.
When completing the FAFSA, report assets accurately as of the filing date based on ownership shown on account statements. Parent-owned 529s go in the parent asset section regardless of beneficiary. Grandparent accounts don’t appear anywhere on the form. Distributions from any 529 used for qualified expenses never count as income. These rules aren’t complicated once you understand the principles – ownership determines reporting, and qualified distributions generate no income reporting requirement.
College funding involves balancing tax benefits, investment growth, aid eligibility, and actual education costs over four or more years. Families who save in 529s while understanding aid impact make informed decisions that typically outperform families who avoid saving due to aid concerns. The certainty of tax-free investment growth beats the speculation of preserved aid eligibility that may never materialize in meaningful amounts. Your college savings represent preparation and opportunity – the ability to choose schools based on fit rather than just financial aid offers, the flexibility to cover gaps in aid packages, and the freedom from depending entirely on loans to finance education.
If your family is navigating college planning and wants comprehensive guidance on optimizing both college savings and financial aid positioning, Saxon Financial Group works with Texas families facing these exact decisions. Our planning addresses education funding within your broader financial picture, considering retirement security, tax efficiency, and multi-generational wealth transfer alongside college costs. We help families understand not just whether 529 plans affect aid, but how college funding fits into your complete financial strategy – so you’re making decisions that serve your family’s interests across all your planning goals, not just the next FAFSA filing deadline.
Disclosures
Saxon Interests, Inc. (“Saxon Financial Group”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Saxon Financial Group and its representatives are properly licensed or exempt from licensure.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
