What Grandparents Should Know About Opening 529 Accounts
Find out whether a grandparent's 529 plan will affect their grandchild's ability to secure additional financial aid.
I opened a 529 account for my granddaughter. Will this affect her prospects for financial aid?
SEE OUR SLIDE SHOW: 7 Smart Ways to Pay for College
A grandparent-owned 529 is not reported as either a parent or student asset on the Free Application for Student Financial Aid (FAFSA). That can be a big advantage because parents are expected to contribute up to 5.6% of their assets toward the college bills, according to the federal financial aid formula, and students are expected to contribute 20% of assets. As soon as the money from the grandparent-owned account is distributed, however, it is considered student income and must be reported as such on the next year's FAFSA, says Deborah Fox, president of Fox College Funding in San Diego. Students are expected to contribute 50 cents of every dollar of income toward the college bills, after an allowance of about $6,000 (the CSS Profile, a financial aid application used by some private schools, also assesses student income but does not provide an allowance). The same is true for 529 withdrawals from accounts owned by anyone who isn't the parent -- whether it's a grandparent, another relative or a friend.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Families who expect to qualify for need-based aid should time the withdrawals from that 529 until the last financial aid form has been filed, after January 1 of the student's junior year of college, says Fox. That way, the distribution won't affect the award. If you need to access the account before then, she recommends switching the account owner from the grandparent to the parent, if the plan allows it. (If it doesn't, you can transfer the account to another state's plan that does; see SavingforCollege.com for each state’s rules). Either way, the money in the 529 would be counted as the parents' assets, but the withdrawals would not be reported as income on the financial aid application.
For more information about the financial aid process, see 7 Pitfalls to Avoid When Paying for College, Financial Aid Strategies With a Catch and Cracking the Financial Aid Code.
-
Stocks Chop as the Unemployment Rate Jumps: Stock Market TodayNovember job growth was stronger than expected, but sharp losses in October and a rising unemployment rate are worrying market participants.
-
Should You Renew Your CD?With rate cuts impacting earnings, we examine if now is a wise time to renew CDs.
-
7 Ways to Plan Now to Save on Medicare IRMAA Surcharges LaterUnderstand the critical two-year lookback period and why aggressive planning before you enroll in Medicare is the most effective way to minimize IRMAA.
-
New Ways to Use 529 PlansTax-free withdrawals from 529 plans could help you sharpen your job skills.
-
I Want to Help Pay for My Grandkids' College. Should I Make a Lump-Sum 529 Plan Contribution or Spread Funds out Through the Years?We asked a college savings professional and a financial planning expert for their advice.
-
How Intrafamily Loans Can Bridge the Education Funding GapTo avoid triggering federal gift taxes, a family member can lend a student money for education at IRS-set interest rates. Here's what to keep in mind.
-
How an Irrevocable Trust Could Pay for EducationAn education trust can be set up for one person or multiple people, and the trust maker decides how the money should be used and at what age.
-
UTMA: A Flexible Alternative for Education Expenses and MoreThis custodial account can be used to pay for anything once the beneficiary is considered an adult in their state. There are some considerations, though.
-
Coverdell Education Savings Accounts: A Deep DiveWhile there are some limitations on income and contributions, as well as other restrictions, a Coverdell can be a bit more flexible than a 529 plan.
-
529 Plans: A Powerful Way to Tackle Rising Education CostsContributions to 529 plans grow tax-free and are not taxed when they are used to pay for qualified educational expenses for the beneficiary.
-
Are Student Loans Being Forgiven or Not?Student Loans The House and Senate voted to repeal President Biden’s student loan forgiveness plan, but does it even matter?
