February 1, 2024

Does a 529 Affect Financial Aid or Scholarships for Students?

A student wearing a graduation gown holds out a degree in an image intended to symbolize college attendance and academic success.

The path towards higher education is marked not only by academic challenges but financial ones as well. As parents plan for their child’s future, they may consider a variety of options, such as scholarships, grants, and other forms of financial aid. One option available to families of students heading to college is Future Scholar, South Carolina’s 529 College Savings Plan. While this plan can be an excellent asset for success, it raises a few questions: does having a 529 impact your financial aid eligibility, and how does it interact with scholarships? 

In this article, we will address these and other important questions related to the Future Scholar 529 savings plan, its impact on financial aid and scholarships, and how it can assist you in achieving your academic goals.

What is a 529 Plan?

A 529 plan is a savings plan that provides tax advantages for future education expenses. These savings plans are state-sponsored flexible accounts that can be used for qualified education expenses at various schools across the United States. In simpler terms, it is a savings account that functions like any other bank account but is designed specifically for education expenses. The main benefit of a 529 plan is that earnings on your savings are tax-free, and you won’t have to pay taxes on the money you withdraw from the plan to pay for college costs.

What is Future Scholar, and Who is Eligible?

Future Scholar is South Carolina's 529 Savings Plan and is designed specifically to help parents across the state save for their child's future education. 529s are managed at the state level, which allows them to be tailored to the unique needs of the students who acquire them and are eligible to be opened by anyone 18 and older.

What Should You Know About Financial Aid?

To understand the impact of 529s on financial assistance, it's important first to explain a few of the different types of aid available to students. Scholarships, grants, and loans are common forms of financial assistance, with eligibility varying depending on the type. Merit-based scholarships, for example, are granted to students who have achieved good grades or other academic accomplishments. They can also be awarded to those who have excelled in non-academic areas such as sports and extracurricular activities.

On the other hand, federal student aid is granted to students based on their ability to contribute to education costs, which is determined by household income. To apply for it, you need to submit a Free Application for Federal Student Aid (FAFSA) and calculate your Student Aid Index (SAI), previously called the Expected Family Contribution (EFC). While this aid type can benefit families, it's important to note that federal student aid usually doesn't cover the entire cost of education expenses. For this reason, regardless of eligibility, it's still recommended to have a savings plan in place to cover any additional costs.

A smiling young woman wearing a graduation cap and gown looks off into the distance, likely at classmates or family members. There are out-of-focus trees in the background behind her.

Do 529 Plans Affect Scholarships and Other Financial Aid?

The short answer: 529s do not impact merit-based scholarships and have minimal impact on need-based grants

Because merit-based scholarships are awarded based on academic achievements and not household income, 529 savings do not affect eligibility for these scholarships. However, since 529 savings are considered assets, they are factored into the federal financial aid calculations. While this may affect your eligibility for federal student aid, only a small percentage (roughly 5.6%) of the 529 assets are included in the SAI calculation. By comparison, other investment accounts, such as Uniform Gifts/Transfers to Minors Act accounts (UGMA/UTMA), are assessed at a higher potential rate of 20%. 

This means that while 529 savings may increase your SAI score and potentially lower the amount of federal financial assistance you're eligible to receive, they impact it significantly less than other investment accounts. Additionally, the inherent tax benefits on earnings and withdrawals make 529s an excellent option for parents looking to ensure their education dollars go further.

Should You Invest in a 529 Plan?

Parents who rely on federal financial assistance to pay for their children's college may hesitate to contribute to a 529 savings account, as it could reduce their potential financial aid. However, it's important to note that the negative impact of a 529 plan on federal assistance is much lower than the long-term potential benefits. Federal aid usually doesn't cover all college costs, and by saving ahead, parents can reduce the amount of loans their children will have to take out and repay after graduation.

Additionally, while 529 savings plans are designed to cover education costs, the money is still yours to spend as you see fit. This means it can be used on non-education related spending (though there may be a penalty fee, and the earnings will be subject to ordinary income tax) or, as of 2024, up to $35,000 of what's in a 529 account can be rolled over into a Roth IRA for the beneficiary, provided they've owned the account for at least 15 years.

All that's to say, while there is a potential for a 529 savings plan to impact a student's college aid negatively, the benefits of saving through this type of account far outweigh any potential downsides.

Invest in Something That Matters

Saving for college can be challenging, but Future Scholar, South Carolina's 529 College Savings Plan, makes it easy. While it does affect federal financial aid considerations, the impact is minimal, and the long-term benefits of a tax-advantaged savings account, such as reduced dependence on student loans and flexible spending options, outweigh the potential drawbacks, making Future Scholar an excellent option for parents looking to save for their child's future.

Looking to get started? Visit futurescholar.com/enroll for simple step-by-step instructions on how to sign up. If you have any additional questions, you can go to our FAQ page for further information. 

Do something that matters for those who matter most. Invest in Future Scholar; get started today!