Many parents may be familiar with the advantages of 529 plans, however there are several key areas that may be blind spots to individuals saving for their student's education. 

Jul. 17, 2017 Video

College Savings Planning

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As students head back to school, many families are being reminded of their college saving goals. But families need to be aware of some of the pitfalls associated with college savings plans. Whether it's parents, grandparents, aunts or uncles, or other supportive figures who care about the educational goals of a young person, the 529 plan is one of the most popular savings vehicles to help prepare for those higher savings goals. 

However, as the average 529 account maintains a balance of around $21,000, many families are also having to leverage financial aid to send their students to college. And while many parents may be familiar with the advantages of 529 plans, we'll be focusing on several key areas that may be blind spots to individuals saving for their student's education. 

Number one, beware of the grandparent 529 plan. When calculating eligibility for federal student aid, a family fills out a free application for federal student aid form. Otherwise called the FAFSA form. Using the data in this form a determination is made as to what the expected family contribution or EFC is for a family. That number is determined by calculating the parents' income, the parents' assets as well as the student's income and student's assets. With that in mind distributions from a non-parent 529 account may be considered student income which counts as much as 50% for the expected family contribution of the FAFSA application.

As a result it makes more sense for grandparents and other family members to contribute to a parental 529 as opposed to owning their own account. Or if other family members feel more comfortable owning their own 529 account, their distribution should be made in the student's last year of college when they won't be filling out another FAFSA the following year for student aid.

Number two, don't settle for your state plan. A number of states will allow for 529 account owners to receive state tax benefits by contributing to 529 accounts even in other state plans. 

Number three, parents watch out for retirement. As mentioned previously, any liquid assets owned by the parents may be counted against the student's expected family contribution which is calculated on the FAFSA forms which determine federal financial aid eligibility. This includes the sale of a home, inheritance, even company stock options. So parents that are considering taking steps towards retirement while their kids are in college may want to wait a few years.

Number four, don't overlook the FAFSA. For many families in higher income brackets their assumption is that their student would not qualify for student aid. In fact a third of families making over $100,000 last year didn't bother to fill out a FAFSA form. That's unfortunate because 16% of high income families received an average of $6,580 in grants last year. So don't get tripped up by thinking that you may make too much for your student to receive student aid.

Number five, wait on the vacation home. Now that the kids have left the nest, it's not uncommon for parents to consider purchasing a vacation home. Before you put a down payment on that beach house, know that equity in a second home is considered a liquid asset on FAFSA profiles. Equity in a family's primary residence however does not count as an asset on a FAFSA form.

And lastly, FAFSA applications don't take into account the value of a parent's primary residence or their retirement accounts when calculating student aid need. The reason is that the government doesn't want people dipping into retirement accounts, insurance policies or selling their home to pay for college. But again second homes, rental properties, non-qualified accounts and cash will all be factored in determining the family contribution amount.

For further questions about 529 accounts and student aid, please don't hesitate to contact Mariner Wealth Advisors. 

This video is limited to the dissemination of general information and is not intended to be legal or investment advice. Nothing herein should be relied upon as such. The views expressed are for informational purposes only and do not take into account any individual personal, financial, or tax considerations. There is no guarantee that any claims made will come to pass.

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