Which 529 College Savings Plans are Reported on the FAFSA?

Which 529 College Savings Plans are Reported on the FAFSA?

On the FAFSA we listed the value of all three of our children’s 529

plan accounts, not just our oldest son’s 529 plan. There was no way to

differentiate the amounts among the three children. Can we change

this and enter only the amount of the oldest son’s account since we

won’t be using the other two children’s accounts to pay for his

college education.

— Dave B.

The value of all 529 college

savings plans, prepaid tuition plans and Coverdell education savings

accounts owned by a parent or by the parent’s dependent children must

be reported as a parent asset on the FAFSA, regardless of who is

listed as a beneficiary on the account. From 2006-07 to 2008-09,

custodial 529 plan accounts owned by a dependent student were not

reported as assets on the FAFSA due to a legislative drafting

error. Prior to 2006-07 only 529 plan accounts that listed the student

as a beneficiary were reported as assets on the FAFSA, with custodial

accounts reported as a student asset and regular accounts reported as

a parent asset. (Prior to 2006-07, prepaid tuition plan accounts were

not reported as an asset on the FAFSA, but instead were treated as a

resource, reducing aid eligibility dollar for dollar.)

The Higher Education Reconciliation Act of 2005 (P.L. 109-171)

amended sections 480(f) and (j) of the Higher Education Act of 1965 to

specify that all qualified education benefits are reported as assets on

the FAFSA effective with the 2006-07 academic year. Qualified

education benefits include 529 college savings plans, prepaid tuition

plans and Coverdell education savings accounts. This represented a

change in the treatment of prepaid tuition plans, which previously

were treated as resources, reducing aid eligibility dollar for

dollar.

The Higher Education Reconciliation Act also attempted to clarify that

qualified education benefits are treated as an asset of the parent,

not the student, even if the student is the account owner. This is a

much more favorable treatment than counting them as student

assets. But a legislative drafting error caused student-owned

qualified education benefits to be ignored on the FAFSA. The language

that was enacted read “A qualified education benefit shall not be

considered an asset of a student for purposes of section 475,” without

specifying that the qualified education benefits should be treated as

parent assets. (Section 475 refers to the need analysis formula for

dependent students.) The US Department of Education adopted a

literal reading of the law, causing custodial 529 college savings

plans to be ignored on the FAFSA. See, for example, page 4 of

the attachment to Dear Colleague Letter GEN 06-05

where the US Department of Education wrote “For dependent students, a

qualified education benefit shall not be considered as an asset of the

student; rather, a qualified education benefit would only be reported

as an asset of the parent if the parent (including a step-parent) is

the owner of the account or plan.”

The US Department of Education further clarified in

Dear Colleague Letter GEN 06-10

that all plans owned by a parent must be reported on the FAFSA, even

if the applicant is not the beneficiary: “Note that the value of all

plans owned by the parent of a dependent applicant must be reported as

an asset of the parent. The value of all plans owned by the

independent student applicant (or spouse) must be reported as an asset

of the student. These include accounts with a designated beneficiary

other than the student for whom the FAFSA is being completed, such as

a sibling of the dependent applicant or a child of the independent

applicant.”

The legislative drafting error was corrected by the College Cost

Reduction and Access Act of 2007 (P.L. 110-84) effective with the

2009-10 academic year. The treatment of student-owned (custodial) 529

plan accounts was changed to count them as though they were parent

assets if the student is a dependent student and as student assets if

the student is an independent student. The legislative language

adopted by Congress is also consistent with the requirement to report

all 529 plan accounts owned by a dependent student or parent as a

parent asset, regardless of who is named as a beneficiary on the

account. The language that was enacted read “A qualified education

benefit shall be considered an asset of (A) the student if the student

is an independent student; or (B) the parent if the student is a

dependent student, regardless of whether the owner of the account is

the student or the parent.”

Source: Fastweb

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