How to Think About Financial Aid and Paying for College in 2023

These accounts — which are run by states and allow money to both grow tax-free and be withdrawn free of tax as long as the money is used to pay for qualified expenses — are usually the best way to save for a child’s higher education. And they have minimal effect on federal financial aid eligibility. In the end, income matters far more than savings when the federal government calculates your aid package, which draws on information inside your Free Application for Federal Student Aid, or FAFSA. (As for falsifying information on a FAFSA, beyond the obvious ethical considerations, there are potential fines and jail time.)

But as with anything related to personal finances, it’s complicated.

If the 529 is owned by the parent or the dependent student, it is considered the parent’s asset. This means only a small percentage, or up to 5.64 percent of the account’s value, will be counted when calculating your financial aid eligibility through the FAFSA. For example, if a parent saved $30,000, the aid would be lowered only by as much as $1,692. That’s something, but it’s certainly not worth giving up your savings strategy.

If the 529 account is owned by a grandparent or another relative, it is not included in financial aid calculations. Once the money is withdrawn to pay for college, however, it has counted as untaxed income reported on the annual FAFSA. Some good news: Grandparent withdrawals will no longer be reported on the upcoming financial aid form, released in December for the 2024-25 academic year, financial aid and 529 experts said.

Then there’s the question of retirement accounts. Some financial experts suggest putting at least some college savings into a Roth I.R.A., which isn’t taken into account for financial aid purposes until you start taking money out. Once you do, withdrawals are counted as income — and that could hurt your eligibility for financial aid a couple of years down the road. If the student will graduate in four years, distributions from a Roth I.R.A. on or after Jan. 1 of the sophomore year in college won’t affect aid eligibility, Mr. Kantrowitz, the student aid expert, said.

How much will it cost (for a four-year college degree) each school year to enroll full time in 2023, plus books and course-based devices/materials, eat meals on campus, reside in a college-operated dormitory or apartment, cover college-sponsored health insurance/medical costs and transportation to and from college from home four times a year — as an independent student earning only irregular income at poverty level — regardless of race, etc.? — Joel, Maryland

Independent students generally qualify for more federal financial aid than their dependent counterparts, but gaining such status isn’t as simple as moving out of your parents’ home or having them no longer claim you when they file their tax returns.

There are several qualifying factors, including being at least 24 years old; married; a graduate student; or having dependents of your own.

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