The U.S. Department of Education has recently clarified that Coverdell education savings accounts (Coverdell ESAs) will now be classified as a parental asset, not a student asset, under federal financial aid rules. This new treatment is more favorable than if the account were considered a student asset, because parental assets are assessed at an annual rate of 5.6%, compared to a 35% assessment rate for student assets (this means that 5.6% of a parent's assets must be applied to college costs each year as part of the expected family contribution, compared to 35% of a student's assets).
In addition, the U.S. Department of Education has provided guidance on the treatment of distributions from Coverdell ESAs and 529 state savings plans. Previously under federal financial aid rules, the entire distribution (contributions and earnings) from a Coverdell ESA was treated as student income and assessed at a rate of 50%. Also, the earnings portion (but not contributions portion) of any distribution from a 529 state savings plan was treated as student income and assessed at a rate of 50%. Now, however, the U.S. Department of Education has clarified that qualified distributions (those that would qualify for federal tax-free treatment) from a Coverdell ESA and a 529 state savings plan will not be counted as student income. The result is that the federal financial aid treatment of Coverdell ESAs and 529 state savings plans is now identical--both are considered parental assets and qualified distributions are not counted as student income.
The federal treatment of 529 prepaid tuition plans hasn't changed--a prepaid tuition plan account isn't classified as either an asset of the parent or student, but distributions are applied to the student's college expenses and reduce the cost of attendance.