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529s: Cap or Protect?

November 9, 2022
Molly Price
Client Success Team Lead
Jennifer Sheppard
Client Success Manager

The government allows families to use up to $10,000/year of their 529 funds toward K-12 education. How can schools handle 529 savings in Clarity?

Molly: Protecting 529s

Some schools aren’t comfortable considering $10,000 of a family’s 529 savings to pay for a K-12 education, since many families who receive financial aid have small amounts in their 529 account. If a family has been saving for years and has built up $3,000; $4,000; or even $10,000; schools don’t want to ask them to spend even a percentage of that well before college. 

An alternative would be a protection of an amount you feel is a fair representation of college costs. Protecting $100,000; $200,000; or even $300,000 may still yield you some tuition dollars from 529s in select cases. This approach targets higher asset families while allowing those with smaller 529s to continue to build their college funds. Families who’ve saved aggressively for college will continue to reap the benefits of accelerated growth from the higher principal in their 529s, even if using a small portion of those funds on their K-12 education expenses.

Jennifer: Capping 529s

As Molly mentioned, the government limits families to use only up to $10,000 of 529 funds for a K-12 education. An option in the Clarity methodology is to cap the 529 weighted amount at $10,000. Placing the $10K cap means that the most this asset would add to the net weight asset amount of a family would be a maximum of $10,000.

An important word to note here is that 529 is an ASSET. There are many families applying for aid who have not been able to save for college and, by placing a cap of $10,000 on this asset, you are acknowledging that such saving capability is an asset while at the same time honoring the limits of how the 529 can be used. The amount in the 529 up to $10,000 is then part of the total net weight asset for a family, where then a percentage of that total is added back into the non-taxable income for that family. The whole amount is not being added back in so, for the family that has only saved a few thousand dollars in the 529, the amount being added back into non-taxable income is only a small percentage.

This approach honors the 529 as an asset without dramatically altering the school’s expectations for a family to use this money for independent school tuition. This also honors that families with higher amounts in their 529 plans aren’t expected to use those funds for independent school, when in fact $10,000 is the maximum allowed for such use and that families tend to think of 529s as purely for college (and very much needed due to the continued rising costs of a college education).








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