No. 5 - by Joe Hurley - January 2003 #2 Q&A

[kcref]

Joe Hurley said in answer to the question of a college counting the 529 asset against the aid package: "Tax-free distributions from a 529 plan also don't get picked up on the FAFSA aid application, at least for now, according to recent rumblings from DOE."

Work sheet B of the FAFSA form for question 45 specifically asks:
"Money received, or paid on you behalf (e.g. bills), not reported elsewhere on the form."

How can this answer jibe with the actual form?

[tjb_nc]

See Joe's FAQ.
http://www.savingforcollege.com/learn/faq.php#ID4

The decision by the DOE to exclude taxfree 529 savings earnings from the 2003-4 FAFSA is since November 2002. I had this confirmed elsewhere, but I don't know if it applies only to savings plans or also prepaids.

[kcref]

tjb_nc,
Thanks for the reply and link. The example in the link outlines the problem I am questioning:
"Assume there is no further appreciation in the account and you withdraw $5,000 in the Fall to pay for the first semester college bills."

My point is that it appears that the Worksheet B for question 45 is speciffically asking for the 529 distribution "paid on your behalf" of $5,000. Won't this in fact have to be included as a income item and penalized by the formula on a $0.50 on the dollar above the $2,500 income (approx) threshold?

If not, please provide details as to why not.

These plans are ripe to wipe out needs based aid in the Sophomore years and beyond if the above is correct...

Thanks in advance to whoever has a definitive documentable answer.

[Joseph_Hurley_SFC]

glebold,

You raise a very good point. But for a dependent student, the Worksheet B item you describe does not apply to cash paid by the student's parents. Seems to me this would exclude any 529 distributions from a 529 account owned by the student's parent. On the other hand, perhaps 529 distributions from an account owned by the student's grandparent or other relative or friend would need to be picked up here. If that is the case (and it is not clear to me that it is) the grandparent or other account owner may want to switch ownership to the parent.

The DOE rumblings I mentioned in my newsletter came through the Fall training workshop of the National Association of Student Financial Aid Administrators. Apparently, NASFAA got their information through discussions with DOE personnel.

For anyone who missed the newsletter it is available here. Registered users at www.savingforcollege.com can receive it automatically for free.

Joe

[supe]

I don't have any answer to your question, but you might check out one of the online financial aid calculators and see if it's likely to be a moot point.

I was worrying about the implications of various savings vehicles until I checked into what it would take for me to qualify for any meaningful aid today.

After doing that, I concluded financial aid considerations could be ignored in my planning, which simplified things quite a bit.

[This message has been edited by supe (edited January 11, 2003).]

[Poweryoga]

Hi Joe

I took out $4,000 from my 529 to cover tuition to a small community college. I received the 1098-T with the $4,000 Tuition amount. I want to take the AOTC and be taxed on the earnings of the $4,000 529 withdrawal
which was only$1,117. Is that proper?

Thank you

Nancy Ruspini