With the rapid rise in the cost of college tuition, room and board and book costs, parents and grandparents alike have recognized the importance of saving early for future college expenses.

According to, a moderate college budget for an in-state public college for 2017-2018 averaged $25,290/yr, while a private college averaged $50,900/yr!

Look at my alma mater, the University of Maryland, College Park. Today the tuition is $9,427/yr, yet the total projected expenses is $24,352/yr. Due to books, room and board, meal plans, transportation and other expenses, tuition is only 39% of the overall cost of tuition.

Now, if I want my daughter, Ryleigh to attend Maryland in 17 years – about the next year she may have any hope of watching a national championship in basketball like I did in 2001 – she may be looking at an annual cost of $55,818/year for a 4-year cost of $240,576.

Therefore, as shown in my analysis below, to fully fund 4 years of college ($240,576), I need to start saving $560/month from now until 2037 or invest a lump sum of $81,746 assuming a reasonable 5% annual growth rate. The reality is that for most parents, even those in the prime of their careers, this can be difficult. Especially when you factor multiple children!


The 529 plan is a college savings plan created under the Small Business Job Protection Act of 1996 to allow taxpayers a tax-advantaged way to save for higher education expenses. In the past, individuals used a variety of means to save and pay for college. The methods included UTMA/UGMA accounts, taxable savings accounts or home equity lines of credit (HELOC). Unfortunately, these methods all come with their own disadvantages and interest on HELOC’s are no longer tax deductible for this purpose!

While 529 plans are actually very complicated, and vary by state, they offer several great benefits:

  • Potential state tax deduction for contributions made:
  • Tax deferred growth of the earnings.
  • Tax Free Withdrawals for qualified educational expenses.

According to Edward Jones, only 29% of Americans even know that 529 plans are a college savings tool.

With all these great benefits, grandparents who are looking to help their grandchildren save for college have started to contribute to 529 plans because they too may get a tax deduction up-front (not all states). However, very few people realize how these 529 plans can impact the ability of the child to receive financial aid when they fill out the Free Application for Federal Student Aid (FAFSA) form.


The ownership of the 529 plan is the primary determinant on how this type of account asset impacts financial aid.

According to

  • If a 529 is owned by a student who is a dependent of their parent, or by the parent, it is reported as a “parent asset” on the FAFSA form and distributions are ignored.
    • Parent assets on the FAFSA can reduce eligibility for need-based aid by up to 5.64% of the asset value.
      • Example: a $10,000 529 plan could reduce aid eligibility by $564.
  • However, if a 529 plan is owned by anybody else, such as a grandparent or other family member, the distributions will count as untaxed income to the beneficiary.
    • The 529 asset is not reported as an asset on the FAFSA form – great news – however….
    • Distributions from a 529 owned by anyone else will reduce eligibility for need-based aid by as much as 50% of the amount of the distribution!
      • Example: a $10,000 529 plan could reduce aid eligibility by $5,000!


While the grandparent owned 529 on its own is a great thing, you want to consider when to distribute the funds for the child so you do not affect potential student aid.

Since the FAFSA uses the Prior-Prior Year (2 years ago) for income and tax information, you can wait to take a withdrawal from the grandparent 529 until after January 1st of the beneficiary’s sophomore year in college. For Freshman year, and the first semester of Sophomore year, simply use a parent 529 if available or other sources.

A word of caution. 529 distributions must be made in the year the expense is incurred. Therefore, if you wait until after graduation and use the 529 proceeds to pay off student loan debt, this is not a qualified distribution and will be subject to ordinary income taxes on the earnings and a 10% penalty.


Financial Planning is not just about managing investment portfolios. More importantly it is about having someone you trust to guide you when the unexpected occurs and to make sure your family has a trusted resource to rely on. We aren’t just advisors, we are financial coaches, trainers and accountability partners who help you with the following:

At Abel Financial Management, we are an independent, fiduciary, financial planning firm with a mission to help you make smart decisions with your money. Steve is a CERTIFIED FINANCIAL PLANNERTM and Partner at Abel-Financial Management. He can be reached at or at 410-307-1202.



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