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Will my father's 529 affect my son's financial aid?

December 14, 2011: 5:05 AM ET

My father has opened a 529 college savings plan for my son. He would like to add me as power of attorney on the account, but I don't want the account to be on the financial aid application once my son applies to school. Will his 529 be counted in the aid calculations? –Craig Thigpen, San Anselmo, Calif.

When you apply for financial aid, a 529 plan has to be reported as a parental asset if it's owned by that parent or the dependent student. If your father gives you power of attorney on the 529, you'll be able to act on his behalf, but he'll still be the account owner.

So the good news is that the money in your father's 529 doesn't count against your son's ability to snag financial aid dollars. The bad news is that distributions from that plan are reported as untaxed income to the beneficiary (your son). "This has a severe negative impact on aid eligibility, increasing the expected family contribution by as much as half of the amount of the distribution," says Mark Kantrowitz, publisher of financial aid websites Finaid.org and Fastweb.com.

There are a few ways to get around this problem. First, your father could make you the account owner. Most 529 plans allow changes in ownership, but if his isn't one of those, he can simply transfer the assets to a state plan that does allow the switch. (Here's a list of plans and their policies.)

The 529 will then be an asset of yours on financial aid forms. But parental assets are assessed at a top rate of 5.64%, meaning it won't ding your son's aid eligibility nearly as much as a distribution from a third-party 529 will. (Distributions from a parent-owned 529 aren't counted as income for your child.)

If it isn't a large 529 plan, your other option is to have your father wait until your son's last year of school to make withdrawals. "You have to wait until the FAFSA is filed to take that distribution," Kantrowitz says. "Provided the student isn't going on to grad school, it's an effective workaround."

--Kate Ashford

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