ASK KIM
Don't Bail Out of 529 Plans
by Kimberly Lankford

I put $60,000 in a 529 college savings plan one year ago. Now the advisers are saying -- for financial aid purposes -- to get all money out of your child's name. The account earned $11,000 in interest in the year. Is the 10% penalty on the $11,000 or the whole $71,000? Should I even worry about financial aid?

Don't get out of the 529 plan because of financial aid concerns.

First, if you're the account owner of the 529 plan (which is usually the case), it's considered a parent's asset for financial aid calculations, not the student's asset. This can make a big difference. The federal financial aid calculations generally consider 35% of the student's assets to be available for college costs but only expect parents to contribute about 5.6% of their assets.

Second, the penalties for leaving are steep. If you don't use the money for college costs, you will be charged a 10% penalty for a non-qualified distribution. This is assessed only on your earnings -- not the total balance in the account -- but could still leave you with a $1,100 bill. And you'll also have to pay income taxes on your earnings, which you wouldn't have to do if you used the money for college costs.

Even if the 529 account did have a greater impact on financial aid, it might not make much of a difference in your own aid package. If you can afford to put $60,000 into the account in one year, you may not qualify for much financial aid anyway.

Run your numbers through the calculator at Finaid.org or at lender Sallie Mae's College Answer Web site (see the link in the right-hand column for the calculator) to get an idea of how much you might be expected to contribute.

Also see Master the Financial Aid Game for more information about the financial-aid process.

Although some aid comes in the forms of grants, a lot of it is in work-study and loans -- which are far from being free money. Of the $122 billion in student aid awarded for the 2003-2004 school year, 45.5% came in the form of federal loans and 9.2% in nonfederal loans.

Only 19% of student aid came from institutional grants, 10.4% from federal Pell grants and 4.9% from state grants. The rest came from other federal programs and education tax benefits, according to the College Board, which has a lot of great information about college costs and financial aid.

It's always better to build up a college-savings fund so you'll have more options. See The ABCs of Saving for College for advice on reaching your goals.