One of the biggest penalties (and usually not discussed by people selling these plans) is that these plans may significantly increase a family’s Expected Family Contribution (EFC). The EFC is what the Federal government determines to be a family’s minimum responsibility to pay for college. In many cases the amount a family saves in taxes with a 529 is small compared to the grants that they will not be eligible to receive because of that plan. There are other disadvantages of purchasing a 529. If you use the money for something other than specified college expenses, you must pay income tax on the earnings and a 10% penalty. In most cases you have no control over how your money is invested. These plans do incur losses if invested in markets that lose value. Another sometimes hidden part of 529 Plans is that even if you set up separate plans for each of your children, the government counts the total amount of all plans on the first child’s EFC. For example, if you had a $20,000 plan for each of your three children, the first child attending college must include a $60,000 asset on the FAFSA form that will greatly increase the EFC for that child.
EPR will show you ways to save without jeopardizing opportunities for free financial aid.