How 401(k)s, 529s factor into the new FAFSA

investmentnews.com:

This fall could be an unusually stressful time for families with children planning to start college next year.

The cause: Many will be guessing about how much they will have to pay or borrow for tuition.

Not only are they awaiting acceptance letters, but there’s a two-month delay in Federal Student Aid applications as a result of a major overhaul in how the government is assessing eligibility. While the Free Application for Federal Student Aid (FAFSA) is typically published in October for the coming academic year, this year it has been delayed until December.

The new form is a result of legislation passed by Congress in 2021 that sought to simplify the financial aid application process, but a shorter list of questions (about 40 instead of 108) isn’t the only difference that students and their families will see. There are some important changes to the application that will help or hurt financial aid eligibility.

One is that pretax contributions to employer-sponsored retirement plans won’t count as income, which could make participating in 401(k)s beneficial for multiple reasons. And changes to the status of 529 accounts in grandparents’ names stand to benefit students.

But there is less relief than in the past for families with multiple children currently attending college. And small-business owners will have to report assets that had previously been exempt.

“Families are going to go through a lot more stress now, because the FAFSA hasn’t been released yet … You’re going to have a longer period of time between knowing you got in and ‘What aid am I going to get?’” said Ross Riskin, chief learning officer at the Investments & Wealth Institute. “That will put some additional tension on families. Be prepared for those