529 College Saving Plans Can Increase the Cost of College

529 College Saving Plans Are a Scam

Like many good parents, you may be planning for your child’s or grandchild’s college education by contributing to a 529 plan. But you may be shocked to learn that this could increase the cost of their college education! In some cases, this increase can be dramatic!!!!

With a 529 college saving plan, assets grow tax-free. The big financial firms love tax-free growth because it leads to bigger account balances and corresponding higher management fees. The longer-term nature of 529 plan also causes more fees for financial firms. But savings within 529 plans can actually make college much more expensive, thus nullifying any benefit of such tax-free growth savings.

To understand how the above is possible you must first understand that not all students pay the same for college. Most schools require the parents to complete a FAFSA form. What parents disclose on their FAFSA form determines the Expected Family Contribution (EFC), or how much college will cost. Your goal is to minimize your EFC!

Expected Family Contributions (EFC) is Mostly Determined by Family Savings (Not Income)

Family income often is not that big of issue when determining the EFC. For most families, it is savings and investments that mostly affect the cost of college or the EFC. Every dime that is in a 529 is expected to go to pay for college but only a much smaller percentage of savings in the parent’s name is expected to pay for college. Thus, savings in the parent’s name versus in the student’s name or in a 529 plan can dramatically reduce the EFC or cost of college.

EFC Example of a Typical Family Situation

Assuming a two-parent income of $110,000, parents’ savings and investments of $200,000, and one child entering college with $100,000 in a 529 plan, the EFC is calculated at $47,927.

However, if we had zero in a 529 plan and instead an additional $100,000 in the parents’ name (now totaling $300,000) the EFC would have dropped to $33,567. That’s a 14,360 reduction per year in college cost. Totaling over 5 years to a $71,800 difference in college cost.

The $14,360 annual EFC reduction could come in the form of reduction of tuition, increase in grants, student loans or a blend of these and other benefits.

EFC Example of a More Modest Family Situation

Let’s examine a different family situation. Assuming a two-parent income of $60,000, parent’s savings and investments of $50,000, and one child entering college with $50,000 in a 529 plan, the EFC is calculated at $17,250

If the $50,000 previously held in the 529 plan was instead held in the parents’ name, the EFC would be calculated at $9,290. Moving $50,000 in the parents’ name versus remaining in the child’s 529 plan reduces the EFC by $8,510 per year—over five years, a savings of $42,550.

The above numbers are rough calculations with various assumptions and use the 2022 FAFSA formula, which may change every year.

Structuring The Parent’s Savings is Also Important

Savings in the parents’ name versus the child’s name or 529 plan is an important first step to reducing the EFC. Structuring how the parents’ assets are held can also dramatically reduce the EFC.

Eliminating FAFSA visibility of the parents’ savings is fairly simple due to the very narrow way FAFSA calculates funds available for college expenses. Below are various legal ways to take advantage of FAFSA’s narrow calculations.

Most colleges do not consider the value of the parents’ home, money held in life insurance, annuities, or in other tax-deferred retirement plans (IRA, 401[k] and pension fund). They see that money as sacredly devoted to retirement or death benefits and absolutely not allocatable to college expenses.

Most parent’s assets can be hidden from the view of the FAFSA form by placing them in cash value life insurance, annuities or tax-deferred retirement plans. These assets can be converted back to spendable assets after the need for college expenses have passed.

Many Parents Falsely Assume They Cannot Qualify for Aid

But many parents falsely assume that they cannot get assistance with college expense as they assume their income, saving or investments would prevent them from receiving aid. Instead of bad assumptions, they should be talking to an expert who knows how to optimally structure assets for the FAFSA calculations. Sadly, most financial advisors only recommend placing more assets into 529 plans which benefit the advisor’s fees. These advisors don’t necessarily recommend 529 plans out of greed. It just that do not have the training to do better.

A huge issue that many high-net-worth parents don’t realize is that the value of a business or farm is NOT counted in the FAFSA calculation if that business is at least 50% owned by the extended family and has less than 100 employees. A family farm does not count if the family lives on it. This allows for some very wealthy parents to qualify for college expense mitigation.

Most Financial Advisor Are Not Trained Regarding the FAFSA form

The bottom line is not to prepare for college expense by stuffing money into a 529 college savings plan. Instead, you need to meet with an expert that understands the FAFSA form and how to structure family assets for college expenses.

When disussing a 529 plan, ask your advisor if they understand how the FAFSA calculation work. Most of them will not know what you are talking about. It is the equivalent to asking a tax preparer if they heard of the IRS … if the answer is no, would you trust them with your taxes?

The people at Serenity Wealth Management understand the FAFSA form and how to structure assets to mitigate college expenses

If you wish to learn more about this topic and other related personal financial topics, please check out the book The Wealth Conspiracy by Curtis Hill, available on Amazon and Kindle.

A 529 College Saving Plan can increase the cost of college