529 Plans

How a Grandparent's 529 Account Affects College Financial Aid

Distributions from a grandparent-owned 529 savings plan could reduce a grandchild's financial aid. But using one of these strategies can limit the impact.

Question: I read your column Shopping for a 529 Plan for a Grandchild. Don't grandparents have to be careful about opening a 529 for their grandchild because it could hurt his or her ability to get financial aid?

Answer: The way a 529 is owned can make a big difference in the financial aid calculations. If a grandparent contributes to a plan that is owned by the child's parents, the money in the 529 is considered to be a parental asset, and the federal financial-aid calculation expects parents to contribute up to 5.6% of their assets for college costs. Withdrawals from parent-owned 529s are not reported as income on the Free Application for Federal Student Aid (FAFSA).

But some grandparents open a separate 529 if they live in a state that only offers an income tax deduction for the account owner. (Most states that offer a tax break let any residents who contribute to a 529 take the deduction, but some limit the tax break to the account owner.) If the grandparents own the 529, the money in the account is not reported as either a parent's or a student's asset on the FAFSA. But distributions from the 529 must be reported as student income on the FAFSA, and students are expected to contribute 50 cents of every dollar of income toward college bills (after an income-protection allowance of $6,570 a year).

To minimize the impact on financial aid, you could wait to withdraw money from the grandparent-owned 529 until after the last tax year that counts for financial aid. New FAFSA rules that took effect in the 2017-18 school year changed the timing of the tax returns that are used. In the past, withdrawals from grandparent-owned 529s were counted as student income during the first three years of college. Now, distributions made after January 1 of the student's sophomore year of college won’t show up on the FAFSA (if the student graduates in four years). See New Strategies to Get More Financial Aid for more information about the new FAFSA schedule.

Another option is to switch the account owner to the parents before the money is withdrawn to pay for college expenses. That way, the withdrawals will not be reported as income on the FAFSA. However, not all 529 plans let you switch account owners. See www.savingforcollege.com for more information about each state's rules.

Most Popular

Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?
retirement

Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?

In our experience, many have saved enough money to retire comfortably. Yet too many worry about their money running out and want more. Maybe it’s tim…
May 6, 2021
Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 4, 2021
20 Dividend Stocks to Fund 20 Years of Retirement
dividend stocks

20 Dividend Stocks to Fund 20 Years of Retirement

Each of these high-quality dividend stocks yields roughly 4%, and you can expect them to grow their payouts even more. That's a powerful 1-2 combo for…
May 7, 2021

Recommended

What You Need to Know about College 529 Savings Plans
529 Plans

What You Need to Know about College 529 Savings Plans

Do you know how much you’re able to contribute or what the funds could be used to pay for? How about how contributing affects your taxes? Check out th…
April 14, 2021
How to Pay Off $130,000 in Parent PLUS Loans for Just $33,000
Paying for College

How to Pay Off $130,000 in Parent PLUS Loans for Just $33,000

Meet Nate. He took out $130,000 in Parent PLUS loans for his kids. The standard repayment plan will cost him over $170,000. But some smart strategizin…
April 12, 2021
Brandon Copeland: Should Student Athletes Be Paid to Play?
Brandon Copeland

Brandon Copeland: Should Student Athletes Be Paid to Play?

During the height of March Madness, Kiplinger.com contributing editor and NFL linebacker Brandon Copeland and Casey Schwab, founder and CEO of Altius…
March 29, 2021
6 Biden Stimulus Benefits That Pack the Biggest Punch
Coronavirus and Your Money

6 Biden Stimulus Benefits That Pack the Biggest Punch

From stimulus checks to enhanced unemployment benefits, these perks from the American Rescue Plan will provide significant financial relief to million…
March 26, 2021