Thinking about scholarships, grants, and loans can make your head spin. Find out what they are and how they can affect your college plan.
How do 529s impact financial aid?
If the student is a dependent and the parent or student owns the 529 account, the account is considered the parent's asset. As a result, up to 5.64% of its value will be added to the student's expected family contribution (EFC).
For example, a $10,000 balance in a 529 account will increase the student's EFC by up to $564.
If the student isn't a dependent and owns the 529 account, the account is treated as the student's asset and will generally increase the student's EFC at the higher rate of 20% of the account's value.
If someone else (such as a grandparent) owns the 529 account, it doesn't count as an asset for federal financial aid purposes. However, when withdrawals are made from the account to pay for college expenses, they'll generally count as income for the student and, therefore, have a much greater impact on financial aid the following year.
Expected family contribution (EFC)
The amount of money you'll be expected to pay for college out of pocket, which influences the amount of need-based federal aid you'll qualify for. It's mainly based on parent income and assets, student income and assets, the size of your household, and the number of people currently attending college in your household.
Determining your federal financial aid
For some families, financial aid is a significant source of money to help pay for college.
Federal financial aid comes from the U.S. government and includes grants, loans, and work-study programs. This kind of aid is "need based," which means it depends on your income and assets.
To apply, you'll fill out a Free Application for Federal Student Aid, or FAFSA. Many colleges also use the FAFSA to decide how much, if any, financial aid they'll give you. So you should plan to fill one out even if you don't think your child will qualify for federal aid.
You can get an idea of how much federal aid your child might qualify for using the calculator below.
How America pays for college
Source: How America Pays for College 2020: A national study by Sallie Mae and Ipsos. Numbers are rounded.
This visual shows that on average, of the money used to pay for college in 2020, 25% came from grants and scholarships, 44% came from parent income and savings, 13% came from student borrowing, 8% came from student income and savings, 8% came from parent borrowing, and 1% came from relatives and friends.
Financial aid types: What are they?
Some types of college financial aid are based on need, while others are based on merit (such as a music scholarship or community service grant).
Grants are "free money" that you don’t have to pay back. Need-based grants are available as part of a federal aid package. You can also apply for grants from private organizations.
You also don't have to pay back scholarships. Scholarships can cover multiple academic years, but students usually must meet specific criteria to keep the scholarship. (For example, a scholarship may be revoked if a student doesn’t meet a required grade point average.)
Scholarships could be part of a college's aid package, and you can also apply for scholarships from private organizations.
As part of a federal aid package, your child could qualify for a work-study program, which provides paid employment through the college during the school year.
Need-based student loans for both parents and students are available through the federal aid program. Student loans are also available through private loan providers.
You should use these loans as a last resort. Although they may seem like a great source of college money, unlike other types of financial aid, they must be repaid-- with interest.
Though they aren't technically part of the federal financial aid program, you may qualify for tax credits during the years your child attends college. The American Opportunity Tax Credit is an annual credit of up to $2,500 for the first 4 years of college, while the Lifetime Learning Credit is a credit of up to $2,000 each year. (Note that you can't take both credits in the same year.)
All investing is subject to risk, including the possible loss of the money you invest.
For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Vanguard Marketing Corporation serves as distributor and underwriter for some 529 plans.