A 529 College Saving Plan Could Increase College Cost

Parents Care about College Saving Planning

Every parent wants to give their child a strong future. You want college to be possible. You want your child to have choices. You want them to graduate with opportunity, not heavy debt.

That is why many parents open a 529 college savings plan. It feels like the responsible thing to do. A 529 plan can seem like the right choice because it offers tax-free growth when used for education. And in some circumstances, it can be. But parents need to understand how a 529 college saving plan could increase to cost of college. Many financial advisors are ethically compromised by not explaining the negative aspects.

Key idea: A 529 plan may make it look like your family has more money available for college. That availability of money, set aside for education, can reduce the amount of financial aid your child may receive.

In some cases, saving for college in the wrong place can increase what your family is expected to pay for tuition.

If you do the right thing and plan for your child or grandchild’s college education by contributing to a 529 plan, you would expect that to be a good thing, right? However, a 529-plan is frequently what you shouldn’t do.

The truth is, a 529 plan may have negative consequences and make college cost more expensive. Why do financial firms recommend 529 plans? Wall Street firms make money on 529 plans so they continue to push them. This is shameful. Is your current financial planner still recommending 529 plans?

A 529 college savings plan can grow tax-free. Tax-free growth typically leads to bigger account balances. Financial firms often recommend them because larger account balances may also create larger management fees over time. The longer-term nature of 529 plans allows financial firm to collect fees for a longer time. That does not mean every 529 plan is bad. It means families should understand how these accounts may affect financial aid before choosing a 529 plan and the self-serving profit reasons why they may be recommended.

Why a 529 Plan Could Create a Problem

Most parents are told, “Save early. Use a 529 plan.” But college planning is not only about saving. It is also about how your savings are counted.

Many families do not realize that students in the same school may not pay the same final cost. College tuition often depends on what the student and family are expected to pay. What you pay may not be the stated tuition price. It may be based on the Expected Family Contribution, also called EFC.

When your family fills out the FAFSA, certain assets are reviewed to determine how much your family can afford to pay. FAFSA stands for Free Application for Federal Student Aid. Colleges use it to help calculate your expected college cost.

If money is held in a 529 plan, it may be counted as money 100% available for education. That can raise your Expected Family Contribution, also called EFC.

In simple words: The more money FAFSA sees available for college, the more your family may be asked to pay.

That can feel frustrating. You did the right thing. You saved. You planned ahead. You tried to protect your child. But the system may still count those savings against you.

Wall Street doesn’t train advisors on how to structure assets for FAFSA calculations in a way to benefit parents. Instead, Wall Street just asks parents to invest more money in 529 plans for college. This basically just generates more investment management fees for the firms. This is shameful! 

What Family Assets Does FAFSA Consider

Many parents think FAFSA is only about income. It is not. FAFSA looks at income, taxes, family size, number of children in college, savings, investments, and education accounts.

This means two families with similar income may pay very different college costs depending on how their assets are arranged.

FAFSA may review:

• Parent’s income
• Student’s income
• Savings and checking accounts
• Investment accounts
• Education savings accounts
• 529 plans
• Coverdell accounts
• Prepaid tuition plans
• Certain real estate and business assets

Many higher-income families skip FAFSA because they assume they will not qualify for help. That can be a mistake. Some families may still qualify for assistance if their income and assets are structured carefully. Schedule your free, no-strings-attached consultation with Serenity Wealth Management to uncover college financial aid you may be entitled to.

Why Assets Matter So Much

The FAFSA calculations assume that most tuition payments will come from savings and far less from current income. It is estimated that saving and investment values count three times more than income when determining the expected family contribution, EFC. This is fortunate because savings and investments are easily restructured for favorable FAFSA calculations.

The first things FAFSA calculations reviews are the child’s education savings accounts and plans. These include Coverdell savings accounts, 529 savings plans, and 529 prepaid tuition plans.

All savings held for the child’s education expense will be 100% extracted for college expense before tuition aid is considered. Thus, these educational accounts reduce the money available for tuition aid. Thus, it may be best to avoid holding assets in the child’s name or in educational earmarked accounts.

In contrast, savings and investments held in the parent’s name are often only partially considered available for college expenses. Maybe only 25% of money held in the parent’s non-educational accounts, could be considered available.

Reducing 529 college earmarked savings may reduce EFC. Reducing 529 college savings and other college earmarked accounts can increase tuition grants, aid, and other support.

You would think there would be some reward or kudos for saving for college expenses. However, the money within a 529 plan is extracted before other calculations determine if any assistance is available.

The Goal Is Smart Planning, Not Hiding Money

The goal is not to hide money illegally. The goal is to understand the rules and arrange your finances wisely.

Some assets may count against your family more than others. Money in a child’s name or in an education savings account may be treated less favorably. In contrast, other assets may not be included in FAFSA calculations.

Other Assets that FAFSA Calculations Ignor

• The home you live in
• Life insurance cash value
• Annuities
• 401(k) plans
• Pensions
• Certain retirement accounts, IRA, 401K, 457 and more

This is why the location of your savings can matter as much as the amount you save.

Most colleges do not consider the value of the parents’ home. Money held in cash value life insurance, annuities, tax-deferred IRAs, 401(k)s, and pensions is not considered available to support children’s college expenses. They see that money as sacredly devoted to retirement or death benefits and absolutely not available for college expenses.

Understanding the narrow way FAFSA calculates funds available for college can dramatically improve your financial aid results.

Strategies That May Help

Some families may benefit from reducing the amount of visible liquid assets before the FAFSA form is completed.

This may involve moving certain assets into financial tools that FAFSA does not count the same way, such as certain annuities or properly structured cash value life insurance. Typically Wall Street does not train it’s financial advisors how to deal with FAFSA. But the people at Serenity Wealth Management can help you.

Some families may also review rental properties, business income, mortgage planning, or other assets to better understand how their finances appear on FAFSA.

These decisions should be made carefully. They can affect taxes, debt, liquidity, retirement, and long-term security.

The goal is not just to get more scholarships, grants or aid. The goal is to protect your child’s future without hurting your own.

Parents can remove assets from the FAFSA calculations by placing them in cash value life insurance, annuities. After graduation, simply convert these assets back to normal spendable assets. It is best to seek help from an experience Financial Planners to best structure these changes. The people at Serenity Wealth Management can help with this.

Be Careful with Debt

FAFSA does not ask for the parents’ gross income. It uses Adjusted Gross Income, also called AGI. Some strategies may involve borrowing against a home, business, or rental property.

AGI may be lowered by certain deductions, business costs, rental property expenses, and retirement contributions. Self-employed people may also be able to invest more into their business and reduce AGI in the short term. This means that it could be a good idea to invest more now in your business or properties to reduce AGI. However, this can be risky.

This may help reduce visible assets or taxable income in some situations. But debt should never be taken lightly.

After College, Assets Can Be Adjusted Again

Some planning strategies are temporary. After your child graduates, assets may be moved back into normal use. Debt may be paid down. Annuities and cash value life insurance can be cashed in to regain the principle and investment gains.

However, these typically long-term investments should have been structured from the beginning to be converted back to liquid cash. Not every advisor knows how to do this.

But parents must understand the rules first. Some products may have taxes, fees, surrender charges, or limits on access.

That is why the strategy must be designed correctly from the beginning. For college planning, safety, liquidity, and access matter. You may need the money sooner than expected.

A Possible Alternative: IUL Life Insurance

For families with enough time before college, an Indexed Universal Life insurance policy, or IUL, may be worth reviewing.

An IUL can build cash value over time. If properly structured, and IUL can build this cash value without current taxation, similar to a 529 plan. FAFSA generally does not count the cash value of life insurance as money available for college.

This can make IUL life insurance an alternative to a 529 plan for some families. If structured properly, parents may also be able to borrow from the policy’s cash value during the college years. If structured properly without taxation. This may give families more flexibility.

An IUL Provides a Better Tax-Advantaged Way to Pay for College

Restructuring assets before college may save money, but it may not always be tax efficient. For families with enough time to plan, indexed universal life insurance, also called IUL, may be another option.

Some families contribute $250 to $800 per month into an IUL life insurance policy where the child is insured. The parents can still own the policy and control how it is used. Because the child is young, the cost of insurance may be lower. This may allow the policy cash value to grow faster over time.

FAFSA calculations generally do not count the cash value of an IUL life insurance policy. Money inside life insurance may also grow tax-deferred. If the policy is structured correctly, families may borrow from the cash value during the tuition years. Those policy loans may be used to help pay college expenses.

This can be an alternative to a 529 plan for some families. However, IUL is not right for everyone and must be designed correctly, and some families consider it among several alternatives to 529 plans.

Later, the cash value may help with:

• College costs
• A first home down payment
• Future retirement income
• Long-term family wealth planning

Another benefit is flexibility. If the child does not attend college, the money is not limited only to education expenses. That is another different and advantage to a 529 plan.

IUL Must Be Structured Correctly

An IUL is not something to set up casually.

• The policy must be designed the right way.
• It must be designed with minimal cost
• It must be designed with maximum growth
• The funding must be reviewed.
• The costs must be understood.
• The loan strategy must be planned.
• The policy must stay active.

If done incorrectly, an IUL may not work as intended. This is why parents should work with a qualified financial professional who understands college financial planning, FAFSA, and IUL insurance design.

Start Early, But Do Not Give Up If College Is Close

The earlier you plan, the more options you may have. But even if college is already approaching, some changes may still help. Many parents only hear one message: “Open a 529 plan.” But college planning is bigger than that! It is about reducing unnecessary college costs.

Just knowing how to reposition assets can improve your ability to get scholarships, grants, loans and financial aid. This is possible even after the first year of college is over as the FAFSA must be resubmitted each year.

Schedule your free, no-strings-attached consultation with Serenity Wealth Management to uncover how a IUL policy could be a winning strategy that replaces or supplements your 529 college saving plan.

Get Help Arranging your Assets for FAFSA Calculations

Curtis Hill, CFP, IAR and Irina Hill, CPA, IAR, provide independent fiduciary financial advice, wealth management, investment advice, retirement planning, and life insurance in the Long Beach, Lakewood, Carson, Bixby Hills, Signal Hill, Beverly Hills, and the greater los Angeles California area. We also provide advice and strategies to build assets for your children’s education that may be better than 529 plans.

Go to the Calendley.com calendar link below to schedule an appointment with a college plan expert, Curtis Hill or Irina Hill. Discover how there are better plans than 529 plans for saving for college expenses.

Frequent Questions and Answers

Question: Does a 529 college savings plan affect financial aid, and can it make college more expensive?

Yes. Education-designated savings like 529 plans may be reviewed in FAFSA calculations and treated as funds 100% available for college. Because many schools discount tuition based on what they believe a family can pay, larger 529 balances may reduce grants or aid. This can increase the family’s out-of-pocket cost.

Question: How does FAFSA look at income versus assets?

FAFSA works more like a budget review than a strict income cutoff. It looks at AGI, taxes paid, household size, and assets. The article emphasizes that saving assets may matter more than income for many families. Because of this, arranging saving assets properly may be a major part of FAFSA planning.

Question: Whose name should hold savings for the best FAFSA outcome?

The article advises avoiding assets in the student’s name and avoiding education-designated accounts when possible. Student-held savings may be treated as 100% available for college. Parent-owned assets may be treated as only fractionally and partially available for college. Having assets in the parent’s name instead of the child’s name could result in greater financial assistance with college expenses.

Question: Which assets does FAFSA count and which does it exclude?

Counted assets may include taxable investments, non-primary-home real estate, trusts, UGMA and UTMA accounts, CDs, stocks, bonds, brokerage accounts and education accounts like 529 college savings plans. Excluded assets may include the primary home, cash value life insurance, retirement plans, pensions, annuities, and non-education IRAs and 401k accounts.

Question: What strategies does this article recommend?

The article recommends reducing FAFSA-visible assets and, when helpful, lowering AGI. This may include reviewing taxable investments, business income, rental property income, debt, insurance products, and annuities. For longer-term saving, the article also discusses IUL as an alternative to 529 plans. IULs may provide cash value that is generally not counted in FAFSA asset calculations and are also taxed-advantaged.

529 College Savings Plan Summary and Conclusions

When planning for higher education, it’s important to consider how assets are viewed in the financial aid process. A 529 college savings plan may not be the best method. By strategically managing your finances, such as reducing FAFSA-visible assets and potentially lowering your Adjusted Gross Income (AGI), you can enhance your eligibility for aid. The article suggests reviewing your investments and income sources and exploring alternatives like Indexed Universal Life (IUL) insurance, which can offer tax advantages and may not affect FAFSA calculations.

Taking these steps can help ease the financial burden of college expenses while maximizing available resources. Additionally, it’s wise to consult with a financial advisor to tailor a strategy that aligns with your individual goals. Understanding the nuances of financial aid can empower families to make informed decisions about their savings. As college costs continue to rise, exploring diverse funding options becomes increasingly crucial. Utilizing tools like IULs can create a more flexible financial landscape, allowing for better preparation for unforeseen expenses. Ultimately, a proactive approach to savings and investments can lead to greater peace of mind when facing the costs of higher education.