How are 529 plan withdrawals reported and do they affect aid?

A parent-owned 529 is treated gently by the FAFSA. The account balance counts as a parent asset, assessed at a maximum of about 5.64%, and – importantly under the current formula – qualified withdrawals used for the student's college costs are no longer counted as student income, which used to reduce aid sharply. Grandparent-owned 529s also became friendlier: distributions from them no longer appear as student income on the FAFSA, so grandparents can pay without hurting aid. Withdrawals are tax-free when spent on qualified expenses (tuition, fees, room and board for at least half-time students, books, and required equipment). Keep receipts and match each year's withdrawals to that year's qualified costs, because non-qualified withdrawals trigger income tax plus a 10% penalty on the earnings. Spend down the 529 deliberately across the four years to maximize the tax break.