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The No. 1 Fear of 529 Plan Investors

I hear from parents all the time who are afraid that they won't qualify for financial aid because they've stuffed Pile of coinsmoney in a 529 plan.

The Vanguard Group, which is a huge player in the 529 college plan arena, says this financial-aid fear is the No. 1 myth of 529 plans. Yes, that's right it's a myth. Assets in 529 plans rarely hurt a family's chances for financial aid.

There are two big reasons why a 529 plan should not be tarred as an enemy of financial aid:

1. Every family applying for financial aid through the Free Application for Federal Student Aid (FAFSA) receives an asset allowance for non-retirement money, which includes 529 money. How much money you can shelter for financial-aid purposes depends on the age of the oldest parent.

Here is a partial breakdown:

Asset Shelter Table

Oldest Parent Age Asset Allowance

45 $46,600

47 $48,900

50 $52,900

52 455,500

55 $60,200

58 $65,300

60 $69,200

62 $73,200

2. Even if you've saved far more in your 529 plan than the amounts on the chart, the excess still probably won't ruin your chances for financial aid. Why? Because 529 plan cash is treated leniently just like other parent assets. Many parents don't realize that 529 plan money is a parental asset that enjoys better treatment than child assets.

"Whether you have a 529 account, a bank account or a brokerage account, each is counted the same way on the FAFSA," says John Heywood, a Vanguard principal, who oversees the firm's 529 offerings.

For financial aid purposes, parent assets, including 529 plan money, is assessed at a maximum 5.64%. So if you have $100,000 in a 529 plan and you're 55, only $39,800 would be used to calculate financial aid need. You'd multiply $39,800 by 5.64% to see how much potential financial aid you'd lose for being such a good saver.

In this case, your financial aid package would be $2,244 lighter. Put another way, saving $100,000 in your 529 plan would only penalize you by $2,244. That hardly seems painful to me!

Roots of the Stubborn 529 Plan Fear

Why has the 529 plan become a financial-aid boogeyman?

Heywood traces the fear back one and two decades ago when the assets in the old UGMA and UTMA custodial accounts were treated harshly for financial-aid purposes. These asset were assessed at around 35% to 40%. Now that would have been something to worry about.

Lynn O'Shaughnessy is the author of The College Solution, an Amazon bestseller, and she also writes for TheCollegeSolutionBlog. Follow her on Twitter.

529 plan image by Carvalho. CC 2.0.

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