What is the Student Aid Index (SAI)?

If you’ve been through the financial aid process before, you might remember the term “Expected Family Contribution” (EFC). Well, say goodbye to EFC and hello to the Student Aid Index, or SAI. The SAI is the new metric used to determine your eligibility for financial aid. It’s calculated based on the information you provide on the Free Application for Federal Student Aid (FAFSA) form, and it gives colleges a snapshot of how much your family can reasonably contribute to college costs. The SAI is the number you are pulling out of the FASA form.

The Short Answer: Yes, 529 Plans Affect Financial Aid

So, does a 529 plan affect financial aid? The short answer is yes. However, it’s not as simple as saying that having a 529 plan automatically reduces your aid eligibility. There are a lot of details that you need to pay attention to. The way a 529 plan is structured can have a big impact on how it affects your financial aid prospects.

Income vs. Assets: A Tale of Two SAI Impacts

One of the most important things to understand is that income and assets are treated differently in the SAI calculation. Income generally has a much larger impact than assets.

Income

The SAI calculation expects a significant chunk of your income to be available for college expenses. In fact, it assumes that 25% to 35% of a parent’s income could go towards college costs.

To illustrate, let’s say your income increases by $50,000. Using a 30% average, that could increase your SAI by $7,500. That is a substantial amount!

Assets

On the other hand, assets, including 529 plans, are assessed at a much lower rate. When a 529 plan is owned by the parent, only 5.64% of the plan’s value is factored into the SAI.

Consider a $50,000 529 plan owned by a parent. In this case, the impact on the SAI would only be around $2,820. See the difference?

Income’s Heavy Hand: Why High Earners Need to Be Aware

Because income is so heavily weighted, high-income earners may find it challenging to qualify for need-based financial aid. Even with a carefully structured 529 plan, your income could still push your SAI too high to be eligible for significant aid. While the average impact of income is 30%, that number can climb as high as 47%!

It’s important to be realistic about your chances of receiving need-based aid. Many families simply won’t qualify.

The Power of Parent Ownership: Minimizing the Impact

When it comes to 529 plans, ownership is everything. The owner of the 529 plan has a big impact on how it’s treated for financial aid purposes.

When a 529 plan is owned by the parent, it’s considered a parent asset. This is good news because parent assets are assessed at the lower 5.64% rate when calculating the SAI.

For example, if you have $50,000 in a 529 plan that you, as the parent, own, only $2,820 would be added to your SAI. That’s a manageable amount, and it allows you to save for college without drastically reducing your aid eligibility.

For most families, parent ownership is the recommended strategy. It strikes a good balance between saving for college and minimizing the impact on financial aid.

The Pitfall of Student Ownership: A Costly Mistake

Whatever you do, avoid having the student (your child) own the 529 plan. This is a mistake that can significantly reduce their financial aid eligibility.

Why? Because student-owned assets are assessed at a much higher rate: 20%. That means that 20% of the 529 plan’s value will be added to the SAI.

Let’s go back to our $50,000 example. If the student owns the 529 plan, $10,000 would be added to the SAI! That’s a huge difference compared to the $2,820 impact of parent ownership.

Don’t let this simple mistake cost you thousands of dollars in financial aid. Keep the 529 plan in the parent’s name.

Grandparent-Owned 529 Plans: The Big Update

Here’s a piece of good news. There’s been a significant update regarding grandparent-owned 529 plans that could benefit many families.

Under the old EFC system, distributions from grandparent-owned 529 plans were considered student income. This could negatively impact financial aid eligibility because student income is assessed at a high rate.

But now, under the new SAI calculation, grandparent-owned 529 plans are treated much more favorably. In fact, they’re not reported as an asset on the FAFSA form.

That’s right: If a 529 plan is owned by a grandparent, it won’t be counted as an asset at all. This makes grandparent ownership a very attractive option, especially for families who are likely to qualify for financial aid.

If you’re a parent, consider talking to your child’s grandparents about opening a 529 plan. It could be a smart way to save for college without affecting your family’s aid eligibility.

Sibling 529 Plans: Another Benefit

If you have multiple 529 plans for each of your children, those plans do not count against you on the FAFSA form. This is another added benefit to consider.

Key Takeaways: Ownership Matters

Let’s recap the key points about 529 plan ownership:

• Parents owning it: Generally a good strategy.
• Grandparents owning it: Potentially even better, thanks to the recent changes in the SAI calculation.
• Students owning it: Almost always a bad idea.

It’s important to remember that even with the best 529 plan strategy, high-income households may still find it difficult to qualify for needs-based financial aid.

The CSS Profile: A More Aggressive Approach

While the FAFSA form is the standard for federal financial aid, some colleges also use the CSS Profile. CSS stands for College Scholarship Service. Keep in mind that the CSS Profile can be more aggressive in how it views 529 plans.

The calculation used by the CSS Profile can vary by school, making it more complex than the FAFSA. Some schools may consider grandparent-owned 529 plans as an asset, even though they’re not counted on the FAFSA.

If you’re interested in colleges that use the CSS Profile, research their financial aid policies carefully.

FAFSA vs. CSS: How Different Forms Treat 529s

Here’s a quick overview of the key differences in how FAFSA and CSS Profile treat 529 plans:

Feature	SAI/FAFSA	CSS Profile
Parent-owned 529s	Assessed at 5.64%	May be assessed at a higher rate
Student-owned 529s	Assessed at 20%	Assessed at 20%
Grandparent-owned 529s	Not counted as an asset	May be counted as an asset

Strategies for High-Income Families

If you’re a high-income family, traditional financial aid may be limited. But don’t despair. There are still strategies you can use to make college more affordable:

• Focus on tax-advantaged savings: Even if you don’t qualify for aid, the tax benefits of a 529 plan can be significant.
• Explore merit-based scholarships: Many colleges offer scholarships based on academic achievement, talent, or other factors.
• Consider colleges with more generous financial aid policies: Some colleges are known for providing more aid to students, regardless of income.
• Prioritize saving early and consistently: The earlier you start saving, the more time your money has to grow.

Additional 529 Plan Benefits

Even if financial aid isn’t a major factor for your family, 529 plans offer a number of other advantages:

• Tax-free growth and withdrawals: As long as the money is used for qualified education expenses, the earnings in your 529 plan grow tax-free, and withdrawals are tax-free as well.
• Flexibility to change beneficiaries: If your child decides not to go to college, you can change the beneficiary to another family member.
• Potential state tax deductions or credits: Many states offer tax incentives for contributing to a 529 plan.

Qualified Education Expenses

What exactly can you pay for with a 529 plan? Here are some examples of qualified education expenses:

• Tuition
• Fees
• Books
• Room and board (with limitations)
• Equipment

Unqualified Withdrawals

If you withdraw money from a 529 plan and it’s not used for a qualified education expense, the earnings portion of the withdrawal will be subject to income tax and a 10% penalty.

State Tax Deduction

Many states offer a tax deduction for contributions made to a 529 plan. If you’re eligible, claiming the deduction can save you money on your state income taxes.

529 Plan Contribution Limits

The total amount you can contribute to a 529 plan is limited. The limit varies by state, but it’s generally quite high. Any earnings in the account will not affect this limit.

Frontloading 529 Plans

Frontloading a 529 plan means contributing a large amount upfront, close to the gift tax exclusion. In 2024, you can contribute up to $85,000 ($17,000 x 5) in one year, and it is treated as if it were made over the course of 5 years. You can’t gift any more money to the beneficiary for the next 5 years.

When to Start Saving

The earlier you start saving for college, the better. Starting as early as possible, even when your child is born, allows for compounding interest to build up over time.

529 Rollovers

You can rollover unused funds in a 529 plan to another beneficiary or family member. The new beneficiary must be related to the original beneficiary.

529 Plans for K-12 Expenses

529 plans can be used to pay for K-12 expenses, up to $10,000 per year. This can be a great option for families who send their children to private school.

529 Plans for Apprenticeships

529 plans can now be used to pay for apprenticeships. The apprenticeship program must be registered and certified with the Secretary of Labor.

What Happens if Your Child Doesn’t Go to College?

What if you save diligently in a 529 plan, but your child decides not to pursue higher education? Don’t worry, you have options:

• Change the beneficiary: You can change the beneficiary to another family member, such as a sibling, parent, or even yourself.
• Hold the funds: You can hold the funds in the 529 plan for future education expenses. Perhaps your child will decide to go to graduate school later on.
• Withdraw the funds: You can withdraw the funds, but the earnings portion will be subject to taxes and penalties.
• Rollover to a Roth IRA: A 529 plan can be rolled over into a Roth IRA (subject to limitations).

529 to Roth IRA Rollover

A 529 plan can be rolled over into a Roth IRA. The 529 plan must be open for more than 15 years, and the rollover is subject to the annual Roth IRA contribution limits (currently $6,500). The beneficiary must be the owner of both accounts.

529 Plans vs. Other College Savings Options

529 plans aren’t the only way to save for college. Here’s a quick comparison to other options:

• Coverdell Education Savings Accounts (ESAs): ESAs offer tax-free growth and withdrawals, but they have lower contribution limits than 529 plans.
• Custodial accounts (UTMA/UGMA): Custodial accounts can be used for any purpose, not just education, but they may have a greater impact on financial aid eligibility.
• Regular taxable investment accounts: These accounts offer the most flexibility, but they don’t provide any tax advantages.

When to Consult a Financial Advisor

If you have a complex financial situation or you’re simply unsure how to navigate the financial aid process, consider consulting a qualified financial advisor. A financial advisor can help you:

• Develop a personalized college savings strategy.
• Optimize 529 plan ownership.
• Maximize financial aid eligibility.

529 plans can be a powerful tool for saving for college, but it’s important to understand how they affect financial aid. Careful planning and smart ownership strategies can help you minimize the impact on your family’s aid eligibility. Take some time to review your 529 plan strategy and make sure it’s aligned with your financial goals.