Quirks about Getting Education Loans Even with a 529 College Plan

Parents who are considering investing in a 529 college savings plan should be aware that there are some quirky rules about college savings, college loans, financial aid and parental financing for college that could impact the child’s ability to pay for college and should plan their financial investments accordingly.

Parents who are trying to figure out how to maximize their college investments for their child without losing money to some of the quirky college loan rules should be aware of several different factors that affect a child’s financial aid eligibility when applying for college.

When considering which type of 529 college savings plan to invest in, parents should keep in mind that some of the quirky rules about 529 plans and college loans that could cause confusion in the future and may even work against the student by limiting or reducing the amount of financial aid they are eligible to receive from the college or university they want to attend.

Pre-paid 529 plans can be tricky when it comes to taking out college loans in addition to having a pre-paid plan. Because pre-paid plans are paid to the school the money that is pre-paid is considered, for the purposes of financial aid, to be scholarship money and the student’s “need” figure is reduced by the amount of the pre-payment.

So while the pre-paid 529 account was set up to keep tuition costs low, it can mean that the student’s financial aid will be significantly lower than it would be without the pre-paid plan meaning that large college loans at high interest rates will be necessary to make up the shortfall in tuition costs.

Since eligibility for Federal college loans that have low interest rates and flexible repayment terms is based on both financial aid and need, having a pre-paid 529 means that most students and parents won’t qualify for the Federal college loans and will have to take out private loans from banks or other lenders that may not have interest rates that are as low or reasonable repayment terms.

While parents think they are doing the right thing investing in a pre-paid 529 college savings plan they may be doing more harm than good by using a pre-paid 529 plan to save for their child’s future college education.

Keep as much money as possible in the parents’ name. Money that is set aside in the child’s name, even in a 529 account, will directly impact the amount of financial aid that the student is eligible for. A student with a large amount of money in his or her name will not qualify for much financial aid, or large student loans, so keeping the investment in the parents’ name is the best way to invest money for college.

Parents’ contributions to the student’s education are considered when making financial aid decisions but not to the same extent as the amount of money that student has available for college that is in their own name. So in order to make sure that the child receives as much financial aid from the school as possible, keep the investment in the parents’ name, not the child’s.

Parents can expect some reduction in the amount of financial aid offered to their child if they have a 529 account, but it will be only a moderate reduction compared to the drastic reduction in financial aid that would occur if the 529 account was in the child’s name.

When planning for a child’s future it’s important to be aware of all the rules regarding college savings plans and how those investments might affect the child’s financial aid eligibility in the future. It’s always a smart idea to plan ahead for a child’s college education but make sure that the investments will help the child and not their chance at getting a high quality college education in the future.