529 Plans are already treated pretty well by the FAFSA because their money is listed as the owners (most likely the parent) money instead of the beneficiary (the student). Under the Federal Method, this takes you exposure down from 20% to 5.6% on your EFC (Expected Family Contribution).
A quick example of this would be that if you have $50,000 in an account under your child’s name, you would be expected to use $10,000 of it towards tuition in year one. If that same $50,000 was listed as a parent owned 529 Plan, only $2,800 of it would be expected to use in year one.
How can I make the FASFA treat us better financially? First, list either Grandpa or Grandma as the owner on the account. When this is done, you do not have to list the 529 Plan assets as either Parent or Student Assets on the FAFSA form. Now this is fantastic, because none of the money that you worked so hard to save is being used against you!
However, the catch here is that once the money is used for tuition, the money is counted as student income on the FAFSA form the following year. How do you combat that? We advise that you wait until the students Senior year to use the assets, that way there are no more FAFSA’s that need to be filed.