Great News: Congress establishes parity for Prepaid and College Savings Plans

In 2006, Federal rules governing financial aid are changing. Prepaid 529 plans -- such as Independent 529 Plan -- will no longer be treated as an available student resource in the needs analysis formula when determining eligibility for financial aid. Now, under a new federal law, they will be treated the same as any other parental asset.

That's great news for most families using prepaid plans. It means a lot less of your college savings will be counted when you apply for financial aid. And the more financial aid you can get, the farther you can stretch your college savings!

What's changing

Before the change, when calculating student aid, the federal government considered 529 savings plans as an asset of the account owner and no more than 5.6% of the sum could be used to calculate the family’s need. In comparison, prepaid 529 plans were treated as a "student resource" that reduced the need-based award dollar for dollar. The newly approved legislation will allow both types of plans to be treated in this favorable manner, as an asset of the parent, when it comes to calculating a student's eligibility for financial assistance.

Details about the legislation

• On February 8, 2006, the President of the United States signed into law the final version of the "Deficit Reduction Omnibus Reconciliation Act of 2005," part of the fiscal year 2006 budget bill.
• The legislation incorporates a provision that would equalize the federal financial aid treatment of prepaid and savings plan accounts available under Section 529 of the Internal Revenue Code.
• In general, the provision would clarify the treatment of "tuition prepayment plans" under section §480j of the Higher Education Act of 1965.
• Under the provision, both prepaid and savings plan accounts established for the student under section 529 are to be included in the calculation of parental net worth.

Our perspective

Tuition Plan Consortium, the not-for-profit organization that sponsors Independent 529 Plan -- a pre-paid tuition plan designed specifically for use at more than 250 private colleges and universities nationwide -- applauded the inclusion of the "parity" provision.

"This legislation means that all 529 plans – either savings plans or prepaid plans – will be considered equal for financial aid purposes," said Nancy Farmer, President and CEO, Independent 529 Plan. "Now, more than one million American families that currently own prepaid 529 accounts may be eligible for more financial aid than they would have before."

"This is a win for parents and students who will now receive the same financial aid benefit regardless of what type of 529 they choose. This ends the confusion for families and will help encourage more parents to save for college," said Farmer.

A summary of the legislation is available here.