There isn’t a short answer and this isn’t a complete answer to understanding financial aid and 529 plans, but here are the basics.  Under current rules, 529 accounts receive very favorable treatment in federal need-based financial aid calculations.  Financial aid starts out as a simple formula.  A family’s financial need is defined as the cost of attendance (COA) at a specific college minus the student’s expected family contribution (EFC) based on their family’s financial picture.  [Need equals COA minus EFC]. 

Financial aid comes from three primary sources: 1) Federal; 2) State; and 3) Institutional.  Most colleges require the annual submission of the U.S. Department of Education’s Free Application for Federal Student Aid (FAFSA) as the basis for assessing the student’s financial situation.  There are two basic methods used for evaluating the student’s financial need: 1) the federal financial aid methodology and 2) institutional or other methodology.  The federal approach is uniformly applied across the country for public institutions; however, private institutions may use a variety of methods.  The methodologies differ in what assets and income sources are considered from which individuals (parents vs. student) and how each source is weighted.

States may establish special factors for evaluating the student’s eligibility for state sponsored aid.  Some states, by statute or by policy, establish that they do not include assets held in their own state’s 529 plan when determining a student’s eligibility for state sponsored financial aid.  Federal aid is the most frequently used aid by the largest number of students.

Here is a general overview of what assets and incomes are

considered in the Federal Methodology to establish the

Expected Family Contribution (EFC) for school year 2006-2007:

	Student	Parent
Included Income	50% of adjusted gross income over $2,550	22% to 47% of adjusted gross income   (Adjustments are made for several factors including taxes, number of people in the household, the age of the oldest parent, whether there are two parents, ages of children, and the number that are in college at the same time.)
Included Assets	35% of assets owned by student   Included: ·          Mutual Funds ·          Stocks / bonds ·          Bank accounts /savings ·          CDs ·          UGMA/UTMA accounts ·          Trusts	0% - 5.64% of assets owned by parents   Included: ·          Mutual Funds ·          Stocks / bonds ·          Bank accounts / savings ·          CDs ·          Investments ·          Rental property ·          529 savings plans ·          529 prepaid plans ·          Coverdell Accounts ·          Trusts
Excluded Assets & Income	Excluded: ·          Assets in qualified retirement plans ·          Personal possessions – cars, furniture, clothes ·          529 savings plans ·          529 prepaid plans ·          Coverdell Accounts ·          Tax-free withdrawals from a 529 account	Excluded: ·          Assets in qualified retirement plans ·          Equity in principal residence ·          Value of family farm ·          Life Insurance ·          Personal possessions – cars, furniture, clothes ·          Tax-free withdrawals from a 529 account

The Deficit Reduction Act of 2005 provides by statute that effective July 1, 2006, 529 accounts shall not be considered student assets for federal financial aid purposes.  The Department of Education is responsible for issuing guidelines under which the statues are administered.  Because of the many variables regarding financial aid and individual students’ facts will vary greatly, students should contact a financial aid officer at institutions they are considering attending to confirm the school’s specific policy regarding treatment of 529 plans for financial aid purposes.