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How a 529 College Savings Plan Affects Financial Aid

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A 529 plan can save you money while saving for college, but it could also lead to less financial aid. NY1’s Tara Lynn Wagner continued her look at 529 plans and filed this report. .

Lisa Shaheen is the director of financial aid for the New School. She is also a mom.

“Do you have a 529?” I asked her.

“I do. Yes I do!” she answered.

The same cannot be said for a majority of the students enrolled at the university, where tuition is over $40,000 a year.

"It's not as common as we would like it to be. I would say that there is probably about maybe 3% of our population is actually using a 529 plan," says Shaheen.

Part of the problem may be the concern that having money in a 529 plan will hinder your child's chances of getting financial aid. That's because the money in the account is reported as an asset on the Free Application for Federal Student Aid, also known as FAFSA, and used to determine how much the family is expected to contribute toward the cost of college. This is also another reason why the account should be in your name and not your child's. Students are expected to kick in about 20 to 25 percent of their assets. Mom and dad face a maximum of 5.6 percent.

"So it can almost be at 5 times the assessment. $10,000 in the student’s name can affect the aid up to $2500. That same $10,000 extra money in the parents name, no more than $550 will be considered available toward college," says Kalman Chany, Author of "Paying for College Without Going Broke."

So how does all this impact need-based aid? Financial aid professionals say if you are asking the question, it probably does not apply to you anyway.

"I would say that if you have the means to put away for a 529 plan that you would not necessarily be eligible for need based grant aid," says Jacob Goldstein, assistant director of financial aid for Baruch College.

Shaheen agrees, and encourages families to save what they can if they can.

"It is best to have a plan and the money in place when you arrive at college rather than come to college and hope that you are going to get the funding," she says.

Again, all of this is only if your family has the means. While saving for college is definitely helpful, CPA Kathryn Vunic says it should not be at the top of your financial to do list.

"No one is going to give you a loan for your retirement. A child can get a loan for school. So if it means that you're foregoing putting money in your 401k, then no, it should not be above the 401k priority," says Vunic.

View Part 1 of Tara Lynn Wagner’s report on 529 plans here.

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