college

3 ways to make a 529 plan work for you

Every dollar stored in a 529 plan in the parent's or dependent student's name will subtract up to 5.6 cents from your federal financial aid package. That means that if you have $10,000 saved for college in a 529, you'll lose up to $560 in government grants. Mauro says that there's a loophole when it comes to 529 plans held in a grandparent's or relative's name. Sheltered from the federal financial aid methodology, grandparent and relative-owned 529 plans won't be seen by any public colleges or universities.

This won't impact those with low savings. FinAid.org reports that, depending on the age of the eldest parent, the federal methodology allows parents to have from $35,000 to $60,000 in assets including 529 cash, stocks, bonds, mutual funds, real estate and other investments without losing financial aid. Families with high assets may want to transfer cash from a 529 plan to a grandparent's account.

Mauro adds that those attending private schools probably won't be able to get away with the grandparent loophole. The College Scholarship Service, or CSS, Financial Aid Profile, a more in-depth aid form many private schools use to determine financial need, requires students to disclose all 529 plans for which they are the beneficiary.

Kathleen Johnson, president of National College Funding Strategies Inc., a higher education financial planning firm in San Diego, says families can shelter their assets by choosing a savings vehicle that isn't a 529.

"Save money in a vehicle that is excluded from the federal financial aid methodology. Those are retirement accounts, annuities and (cash value) life insurance policies," she says.

While funds stashed in these accounts will be sheltered from the Free Application for Federal Student Aid (but not the CSS profile) when the student starts college, once the student starts taking withdrawals the money will count as income on the following year's aid application and can heavily detract from future aid packages.

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