Parents of college-bound students: If you haven’t heard about the 529 loophole, listen up: Congress passed a law earlier this year, making changes to the way 529 plans and Coverdell ESAs are treated for financial aid purposes.
In the past, these college savings accounts and tuition plans were considered either assets of the account owner (in the case of a savings 529), or an income source (in the case of a pre-paid tuition plan). What this meant was that, if the dependent student was the owner of the 529 plan, the value would be assessed at a rate of 35% (savings), or 100% income source (prepaid tuition). The new law removes these accounts from financial aid consideration altogether.
It’s important to note, the only place that this “loophole” makes a huge difference is if the student owns assets, such as within an UTMA or UGMA, or an existing 529 plan (with the student as the owner). This is probably a small group of families that face this situation, but the impact is significant
If you happen to be in this position, keep this loophole in mind as you file (or re-file) your FAFSA form. In some cases it may make sense to re-file a corrected form to eliminate the account(s).
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I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author
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