529 college savings plans can be a great way to put away money for college and get federal (and possibly state) tax benefits. However, who owns the 529 plan and when the funds are disbursed can impact financial aid eligibility. 

For example, if the 529 is owned by a grandparent, distributions count as untaxed income to the student. If they are disbursed in the first or second year of college, the disbursement can reduce eligibility for need-based aid by as much as 50% of the amount of the distribution. 

If the plan is reported as a parent asset or a student asset, it will reduce eligibility for need-based aid by much less, up to 5.64% and 20% respectively. 

In addition, you can only spend the dollars from a 529 tax-free for certain college expenses. For example, computers qualify, but tablets and mobile devices do not. Paying for college qualifies, but paying for college loans does not.

Sound complicated? Unfortunately, it is. Uninformed or incomplete planning on how to pay for college can be expensive! 

In Chapter 7 of “Never Pay Retail for College,” you can find guidance on financial aid and how to minimize your out-of-pocket costs. The two most important things to know are:

• Complete the financial aid forms – While completing the forms is about as much fun as a root canal, it gives you more options. In addition, your child is more likely to get merit awards if you complete the forms.
• Start planning early – Any asset repositioning or tax planning needs to be done before January of your student’s sophomore year, because FAFSA forms use prior-prior years (PPY) for estimating aid.

Even with the guidance in the book, figuring out the financial planning aspect of college can be complicated and an error can be expensive. So, money spent on expert advice can provide a great return on investment.