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The 529 college savings plans are designed to help parents save toward their children's college expenses by offering tax advantages on the accounts. They are sponsored by state agencies or educational institutions and encourage saving for college.

At one point, 529 college savings plans could have a large impact on a student's ability to apply for financial aid. However, as of July 1, 2006, changes in the federal Internal Revenue Code have lessened the impact on financial aid eligibility by designating 529 plans as parent assets. This applies to both pre-paid tuition plans and college savings plans.

When applying for financial aid, both the student's assets and his parents' assets are taken into consideration. Student assets have a much higher impact on financial aid eligibility. As of July 1, 2007, student assets are assessed at 20%, while parent assets are calculated on a scale with a maximum 5.64% assessment.

To lessen the impact on financial aid eligibility, college savings should be put in a parent's or other relative's name or saved through a 529 plan. By setting up a 529 plan for a student in another relative's name (such as a grandparent), the 529 plan may not need to be mentioned on a financial aid application.

The specific impact of 529 college savings plans and other parent assets on a student's financial aid eligibility will vary from one college to another. Each state (and each school) has their own rules regarding financial aid applications. There are also specific rules in assessing either the 529 pre-paid tuition or college savings plan. When setting up college funds it is always a good idea to work with a qualified financial adviser to find the best solution for your situation.

When meeting with a financial adviser to discuss setting up a 529 college savings plan, ask questions and be sure you understand how each plan may affect financial aid eligibility. Explore the differences between plans that are sponsored directly by a state and those that are not.

Be sure to ask your financial adviser about all fees associated with each 529 plan, limitations on withdrawals, and options for switching beneficiaries or transferring ownership if necessary. Find out which colleges participate in the 529 plan and what expenses can be covered by the savings. Also ask about the 529 plan's investment options and how the plan has performed in the past.

The impact on financial aid eligibility should be considered when setting up a 529 plan. However, a qualified financial adviser can help you find the best savings plan that will provide tax-advantaged savings while minimizing the impact on financial aid eligibility.

Learn more about this author, Susan Quilty.
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