How 529 Accounts Impact Financial Aid for College

Q: I’ve saved a small amount for my daughter’s college expenses in a 529 account. Now I’m worried it will hurt her chances of getting financial aid when she applies in the fall. What should I expect?

A: You’re right to assume that your college savings will influence the amount of money you’ll be expected to cough up for tuition and room and board. But the impact will be minimal.

That’s because college savings accounts don’t count as parental income for financial aid purposes, says Joe Hurley, an expert on 529 accounts and founder of Savingforcollege.com. "It's the income that you report that can have a big impact on your financial aid eligibility," Hurley explains.

The federal aid formula counts between 22% and 47% of parental income toward the amount a family can pay for college expenses. College savings accounts, on the other hand, are considered a parental asset, and are assessed at a maximum rate of 5.64%. So, in general, for every $1,000 you've socked away in your 529, the most your “expected family contribution” (EFC) could increase is about $56.

Your EFC determines how much your child is eligible to be awarded from different federal loan programs, Pell Grants, and work-study; most colleges also use income and asset information to determine their own need-based aid.

For more on 529 college savings accounts, see these answers to common 529 questions.