By Meredith Barnhart, Director of Integrated Communications, Massachusetts Educational Financing Authority.
June 23, 2020
The overlap of college savings accounts and financial aid can be confusing for families, and it’s important to know how they affect one another and to understand the financial aid process before starting to save for college.
Here are answers to some common questions on the subject: 
Q: Does a student get overlooked for financial aid if the family has a 529 college savings account?
A: No. The financial aid office has no idea whether a family has a 529 college savings account, as families lump that information into the total amount of parent investments reported on the financial aid applications. So a student with a 529 college savings account would be treated no differently in the process of applying for financial aid than a student whose family saved in other vehicles.
Q: Do I report my 529 college savings account as a parent investment on the financial aid applications?
A: Yes. You’ll be asked to report investments for both student and parent. Even if a parent owns a 529 savings or prepaid tuition account, and the student is the beneficiary, the family reports those assets as parent investments, rather than student investments.
Q: How does a 529 college savings account affect my eligibility for federal financial aid?
A: As mentioned, your 529 college savings account is considered a parent investment on the financial aid applications, and the financial aid formula assumes that, at most, your family will use 5.6% of those parent investments for college costs (even though your family likely plans to use 100% of your college savings account to pay for college!). That’s good news for savers. So if your family has a $25,000 529 account, for example, the financial aid office will assume that only $1,400 of that is available to use for college costs (so that’s $1,400 you won’t be eligible to receive in financial aid). Assuming that such a small percentage of your 529 college savings account will be used to pay for college significantly benefits students and their families in the financial aid process.
Q: Once I’m offered financial aid, will the amount change once the school learns of my college savings account?
A: The school will have taken into account the value of your college savings account when it considered your total parent investments within the financial aid process. The college isn’t concerned what types of investments those are, even if one is specifically designated for college costs. Therefore, your financial aid won’t be affected even if the financial aid office does learn that your family did save for college in a 529 account.
Q: What happens if my grandparents save for my college. Can that affect my financial aid?
A: A grandparent saving for college is a bit different than a parent saving you college. You won’t need to report the value of that college savings account on financial aid applications, as it’s neither a student nor parent investment. However, when a distribution is made from the 529 account to pay for college, that withdrawal counts as student income in the year it’s made. Student income does play a part in the financial aid formula. You can learn more about that here.
Meredith Barnhart serves as the Director of Integrated Communications at MEFA, the Massachusetts Educational Financing Authority. If you have additional questions about financial aid and college savings accounts, MEFA has the answers. Reach out to their MEFA College Planning Team at (800) 449-6332 or collegesavings@mefa.org.