Does a parental 529 count against a graduate student financial aid?

[mfrank]

I believe graduate schools don't count parental assets for a graduate student over age 21. If there's money in a parental 529 where the student is the beneficiary, I'm thinking that wouldn't count toward the student's financial aid application, i.e., not reduce the amount of the financial aid potentially. Am I right about that?

[dcandmc]

It depends on what the school's policies are and what FA application forms they require. For FAFSA purposes (government financial assistance), any student enrolled in a master's or doctorate program does not need to report parent financial information, regardless of the student's age. Some master's and professional degree programs do require that parent financial information be provided when applying for institutional need-based aid, even for older students. The bottom line is, there is no universal rule; you will need to determine what each school requires.

[mfrank]

Thanks. So a parent owned 529 does not have to be reported by a graduate student applying solely for federal financial aid, correct?

[dcandmc]

The FAFSA, which is used by graduate students to apply for federal financial aid, instructs students to skip the parent financial aid section if the student will be working on a master’s or doctorate program.

https://fafsa.ed.gov/fotw1819/pdf/PdfFafsa18-19.pdf

See the instructions for Step Three, and question 48.

[mfrank]

Very helpful, thanks!

[Mark_Kantrowitz_SFC]

The Higher Education Act of 1965 specifies that a qualified tuition benefit (529 college savings plan, prepaid tuition plan or Coverdell education savings account) is considered to be an asset of the student if the student is an independent student or an asset of the parent if the student is a dependent student, regardless of whether the owner of the account is the student or the parent.

Thus, a parent-owned 529 plan is not reported on the Free Application for Federal Student Aid (FAFSA) of an independent student because parent information is not reported on an independent student's FAFSA. A student-owned 529 plan is reported on an independent student's FAFSA. (A graduate student is considered to be an independent student.)

Note that distributions from a 529 plan that is not reported as an asset on a student's FAFSA will be reported as untaxed income to the student on a subsequent year's FAFSA. Thus, distributions from a parent-owned FAFSA that lists a graduate student as the beneficiary will have to be reported as untaxed income to the graduate student on a subsequent year's FAFSA. Since the FAFSA is on a prior-prior year system, such a 529 plan distribution will be reported as untaxed income on the FAFSA two years after the distribution.

[mfrank]

Mark, thank you so much. If I can impose a bit more, I'm a little confused so I am posing a question alongside your reply in bold ALL CAPS only for easy recognition.
The Higher Education Act of 1965 specifies that a qualified tuition benefit (529 college savings plan, prepaid tuition plan or Coverdell education savings account) is considered to be an asset of the student if the student is an independent student or an asset of the parent if the student is a dependent student, regardless of whether the owner of the account is the student or the parent. BASED ON THIS PARAGRAPH, IF I OWN THE 529 PLAN AND MY DAUGHTER IS A TAX DEPENDENT IN THE YEAR SHE STARTS GRADUATE SCHOOL, THEN IT'S NOT HER ASSET, BUT IF SHE IS NOT A TAX DEPENDENT AT THAT TIME, THEN IT COUNTS AS HER ASSET? IS THAT WHAT YOU'RE SAYING? AND WHAT IS THE RELATIONSHIP BETWEEN THE HIGHER EDUCATION ACT AND FAFSA?

Thus, a parent-owned 529 plan is not reported on the Free Application for Federal Student Aid (FAFSA) of an independent student because parent information is not reported on an independent student's FAFSA. I THOUGHT BASED ON YOUR PARAGRAPH ABOVE THAT IF SHE IS AN INDEPENDENT STUDENT MY PARENT OWNED 529 WOULD BE CONSIDERED HER ASSET? A student-owned 529 plan is reported on an independent student's FAFSA. (A graduate student is considered to be an independent student.)

Note that distributions from a 529 plan that is not reported as an asset on a student's FAFSA will be reported as untaxed income to the student on a subsequent year's FAFSA. Thus, distributions from a parent-owned FAFSA that lists a graduate student as the beneficiary will have to be reported as untaxed income to the graduate student on a subsequent year's FAFSA. Since the FAFSA is on a prior-prior year system, such a 529 plan distribution will be reported as untaxed income on the FAFSA two years after the distribution. SO AM I READING THIS PARAGRAPH CORRECTLY? THE DISTRIBUTION FROM A PARENT OWNED 529 WOULD NOT BE TAXED BUT YOU'RE SAYING THAT SAME DISTRIBUTION WOULD LATER BE REPORTED ON A FUTURE GRADUATE SCHOOL FAFSA AND COUNT AS INCOME FOR THAT FUTURE DETERMINATION FOR THE NEXT TWO YEARS OF GRADUATE SCHOOL? THANKS SO MUCH AND PLEASE FORGIVE ME FOR BEING DENSE!
[/quote]

[Mark_Kantrowitz_SFC]

Dependency status in my response was focused on the definition in the Higher Education Act of 1965, not the Internal Revenue Code of 1986. Based on the Higher Education Act definition, all graduate students are independent students for student aid purposes.

This can get a little confusing because it occurs at the intersection of student aid and tax rules.

A distribution from a parent-owned 529 plan would not be taxed, but could affect the graduate student's eligibility for need-based financial aid, since it would be counted as untaxed income to the graduate student on a subsequent financial aid application.