A 529 as described by Saving for College is “an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs.” Many parents of current college applicants likely set up a 529 account for their kids when they were very young, but they may have been set up more recently. These accounts are exempt from a number of state taxes and can thus fund a college education more efficiently than other accounts. The money is virtually inaccessible until the specified individual enters college. Once this person is done with college any money remaining in the account is taxed heavily. While 529 accounts are commonly set up in the state that a family was living in at the time, they can (in theory) be set up in different states. Many families set up such accounts in Ohio because, while the accounts were not exempt from the laws of the home state, ended up being more prosperous given Ohio’s state laws.
Financial Aid Applications
The presence and size of any 529 accounts in your family’s name may impact your financial aid. It speaks not only to your family’s net worth but also to the estimated need that you have for college. If your family has a considerable amount set aside explicitly for your college education, then you should expect less anticipated need from the organizations that you apply to for aid. Conversely if your family has some money saved but it is not officially designated to go toward your education than you can make the argument that you have a greater need and that the money is going toward something else.
Although opinions may differ, the general idea is that once a student enters college the money in the 529 should be used first. Depending on how much a given family has saved in their account it may cover every aspect of their college education, or it may cover room, board, and books for the first year. While both situations are okay, you and your family should weigh the pros and cons of using the money at different rates. Perhaps it is best to only use the 529 to pay a bit of the tuition each year, and your family can come up with the rest on a yearly basis. If you can use it to cover your first year completely your financial aid need will be considered greater in the following years.
If you get a considerable or full scholarship to a college and you have a plump 529, you may have to get creative. Remember that the 529 can only be accessed for college funds, and if it goes unused, then the money is virtually taxed into oblivion. In these cases you have to look into what exactly counts as a college expense. Perhaps certain summer programs count as college expenses. One student I knew in such a situation used her account to pay for all of her room and board in an abroad program and for books at her home school.
529 accounts should be considered before and during your college experience regarding your financial aid. Talk to your family about whether or not there is one set up for you and the size of the account so you can anticipate any financial aid offers. Finances are no place for surprises, so get explicit numbers and talk, talk, talk. What do you think your first year will cost, and all of your college years? When will the fund run out, and if it is bound to, what are the pros and cons of emptying it sooner rather than later? A 529 is a great place to begin to talk about college financing and where you can expect more or less money to be spent during your college years.