Starting A Section 529 plan might be a strategy that you are considering to help pay for your child’s education. If you have already opened a 529 plan and been saving consistently, then you have already taken the first step in funding your child’s future. In either situation, however, you need to understand how the 529 plan will affect your child’s financial aid eligibility.

First, what is a Section 529 plan? It is a tax-advantaged vehicle designed to encourage savings for education for a designated beneficiary. The earnings inside the plan grow tax-free and are generally not taxed if the money is used to pay for qualified expenses, such as tuition.

Second, a general word about financial aid. Financial aid is a process in which a college determines the amount that a family can afford to pay and then fills the gap between this and the actual cost. The financial aid package is determined by a family’s income and assets. There are formulas and different weights that are given to different assets depending on whether they are owned by a parent or child.

The actual aid a child receives can be comprised of different components. These could be grants, scholarships, work-study jobs, and, of course, loans. Remember, loans must be paid back. Usually an aid package consists of many types of aid and there are no guarantees as to what your child might receive.

We mentioned that formulas are used in determining the amount of aid. The federal government has one — the federal methodology — and the college has one — the institutional methodology. How the 529 plan factors into the financial aid equation might differ depending on which methodology is used.

The start of the process is the financial aid application. This includes listing your assets, income and some personal family information. The term for the federal application is the Free Application for Federal Student Aid (FAFSA). Colleges typically use an application known as the CSS Profile.

After running this data through the formula, you will receive an amount that is called the expected family contribution (EFC). The EFC is the difference between the cost of attendance (COA) and the amount of the college’s financial aid. This is the amount you are thought to have to pay for your child’s education and is your child’s financial need. The COA includes costs like tuition, fees, and room and board. Need varies depending on the school.

Now on to how financial aid formulas treat Section 529 plans. Under the federal methodology, the 529 plan is considered an asset of the parent if the parent is the account owner. A parent’s assets are counted at a rate of no more than 5.6 percent. To translate, every year the federal government treats 5.6 percent of a parent’s assets as available to help pay for college costs. The rate would be 20 percent if the assets were treated as the student’s.

You might be wondering — if I include the assets, do withdrawals count as income on the FAFSA when the funds are used to pay for college costs. The answer is no, the funds do not count as either parent or student income on the FAFSA the following year.

Grandparent-owned 529 plans are different. While not listed on the FAFSA, withdrawals from these accounts are counted as student income on the FAFSA the following year. Student income is assessed at 50 percent. Thus, aid could be decreased by this amount in the year following the withdrawal. To avoid this result for students projected to graduate after four years, it might be best to wait to take a distribution until the calendar year the grandchild begins his or her junior year of college.

To understand how the institutional methodology treats 529 plans, it is best to check with the individual college’s office of financial aid. Negotiating the waters of financial aid can be difficult, and it is always best to consult a financial planner and work closely with the admissions offices of the colleges being applied to.

Marc A. Hebert, MS, CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at