Thinking outside the box in financial aid

Ever have one of those ideas that you keep thinking someone else will do?  I have.  For the past decade, I’ve wanted to try using 529 college savings plans to distribute scholarship funds.  And here’s why.

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If you work in the scholarship field or have ever received a scholarship, you’re probably familiar with the complexity of financial aid.  A constant challenge is displacement – when outside scholarship funds are used in place of college and university funds, but leave the debt and loans in the aid package.  In addition, scholarships cannot pay the Expected Family Contribution (EFC) despite some EFCs that may be completely unrealistic for low-income families.  Both are big problems for students, but neither is an issue for 529 plans.

The backstory

I created the Dell Scholars Program in 2004 to help more low-income students earn a bachelor’s degree.  From the start, we’ve always looked for creative ways to benefit students and optimize the spending power of the funds.  One of the ways we do this is by creating flexible disbursements – only sending the amount of money students need for that year, and saving the rest for later.  When we know our funds will be completely displaced, we directly pay down loans instead of sending funds to the school so students don’t lose more aid.  We’ve contorted so many ways to work with more than 600 colleges and universities, but there must be a better means to address this issue.

Over a decade ago, I asked every 529 plan provider I encountered if they knew if a scholarship provider could send funds through a 529 plan instead of directly to a college or university.  Consistently, the answer was vague, and no one ever called or emailed me back.  A year ago, I was at the National Scholarship Providers Association Conference, and asked Mark Kantrowitz if using 529 plans for scholarships was still possible (from conversations we had almost a decade ago).  Within a couple of weeks, Mark wrote this article. I thought surely people would pick this up…but nothing.  So, after ten years of thinking someone else would try it, it was time to act.

Not giving up

Last March, I went to a 529 plan administrator conference, and needless to say, I was the only non-financial firm or state agency there.  When I’d explain I was with a foundation trying to use 529s for scholarship funds, I got similar reactions to a decade ago.  However, a few suggested speaking to one state program, Utah Educational Savings Program (UESP), that had done some innovative work with child savings accounts and educational accounts in high schools to encourage matching programs from families.  That’s all the encouragement I needed.

We’re currently working with UESP to set up multiple 529 plans through which the Dell Scholars Program can distribute funds, but that the students own.  Why student-owned accounts?  Better financial aid and tax treatment, and they can pay their EFC with these funds. And it doesn’t displace other grants, scholarships, or work study.  Doesn’t that strategy of using student-owned 529 plans give up control?  Yes, but no more loss of control than when we send a scholarship check into a financial aid office.

We will share our learnings over the next year on the progress of this pilot.  If it fails, we’ll look for something else.  But if it works, it can help more students be able to afford a bachelor’s degree.