Believe it or not, most colleges salivate at the prospect of a needy student with a 529 Savings Plan. It enables these “poor” institutions of higher learning to reduce financial aid dollar for dollar and enrich their billion dollar endowment funds.

529 Savings Plans are a financial hazard to the average family, and must be avoided at all costs. In the financial aid formulas, students have no asset protection allowance, and the following are considered student assets: cash, savings accounts, stocks, bonds, savings bonds, mutual funds, UGMA, UTMA accounts, a farm, a business, mortgages held and the net value of any real estate owned.

For college year 2007-2008, 20% of every dollar they have will be lost in financial aid. However, if the student is about to enter college and is unfortunate enough to have a hefty bank balance or brokerage account, it already cost them 25% or 35% in lost financial aid, depending on the college. Parents are more fortunate; they’re only assessed at 5.6% over their allowance which increases with age. Example: older parent age 48 in a 2 parent family = $45,000; a single parent age 45 = $19,700.

If a family will qualify for financial aid, and most do, then those with money in 529 Savings Plans face a far worse fate - all that money (often $100,000 or more) which could have been legally repositioned into financial vehicles that are not included in the financial aid formulas, will all be spent, often before graduation.

A number of states have made contributions state-tax deductible with North Carolina and Pennsylvania next in line. But here’s the rub. A 529 Savings Plan is considered a parent asset when calculating financial aid eligibility, and families will lose 5.6% of the value every year in financial aid. What’s worse is that colleges treat money in a 529 Plan as a resource, reducing financial aid dollar for dollar.

When confronted with the facts, financial aid officers nationwide have made comments such as: “Depending upon the value, there will be annual distributions to pay for tuition and fees.” “Our calculations may vary from year to year.” And this disturbing remark from a prestigious school in New England: “Financial aid is not the issue here, paying for the student’s education is.”

The sad truth is that literally tens of millions of dollars a year are unnecessarily wasted because families are not made aware of the consequences when setting up these accounts. Additionally, numerous brokerage firms have been sued and suspended for misrepresenting 529 Plans in general.