It is no surprise that the cost of college is growing. Year after year, the tuition rates rise along with the amount of student loan debt that students take on. According to an article in USA Today, the average cost of college over the past decade has risen to $34,740 a year, which is up $7,000. Unfortunately, as the cost continues to rise, families are relying on more than just their parents to help pay for it – now, they are looking to grandparents as well.
A 529 College Savings Plan is a great option as it allows you to save money for your child or grandchild’s tuition free from tax when the money is used on qualifying educational expenses. Many parents and grandparents have already jumped on the 529 train, but the problem is, grandparents worry that their 529 contributions are going to negatively affect the student’s need-based financial aid.
The FAFSA or Free Application for Federal Student Aid looks at the income and assets of all parents for students who are considered dependent. When it comes time to fill out the application, a grandparent’s 529 plan and contributions are not looked at or asked for on the FAFSA.
However, the impact a 529 college savings plan can have can be significant depending on who owns it. Here is how a 529 can impact your need-based financial aid:
If a student is considered a dependent, the 529 plan is listed as an asset of the parent on the FAFSA. Distributions from the 529 plan are not counted
If a student is considered independent, the 529 plan is listed as an asset of the student on the FAFSA. Distributions from the 529 plan are not counted
If anyone else owns the 529 plan such as a grandparent, the 529 is NOT listed on the FAFSA, however, distributions from the 529 are counted as income of the student
So, what does this mean for need-based financial aid? Let’s look.
If the student is a dependent and the 529 is listed as a parent asset, the need-based financial aid may be reduced by up to 5.64% of the asset value
If the student is independent and the 529 is listed as their own asset, the need-based financial aid may be reduced by up to 20% of the asset value
If the distributions come from a 529 owned by someone else, the need-based financial ad may be reduced by up to 50% of the amount of the distribution
Ways to Work Around a Grandparent-Owned 529 Plan
Fortunately, there are some workarounds that allow you to avoid the negative impacts that a grandparent-owned 529 college savings plan can have on a student’s need-based financial aid.
1. Change the account owner. One of the first ways to work around the negative impact is to have the grandparent sign over the account to the parent, if the 529 allows this. This will help reduce the amount of impact the 529 has on the student and their aid.
2. Take the distribution later. Since the FAFSA uses tax information from two years ago, so the family can wait to take out a distribution until later. For example, if the student is looking for a two-year degree, the family can take the distribution on January 1st in the sophomore year as there would be no previous year distribution to be considered to reduce the student’s aid.
3. Rollover the funds in the 529. Grandparents can roll over up to a year’s worth of funds into a parent-owned 529. The rollover would occur after the FAFSA has already been filed and the rate at which the student’s need-based financial aid is reduced is much less.
While a grandparent-owned 529 is a great way to save money for their grandchild’s future tuition, it can have some negative affects on the student’s financial aid eligibility when distributions are made. Grandparents, parents, and students should sit down and discuss all options and how these options can affect financial aid. If a grandparent wants to save for college but they do not have a 529 in their name yet, considering having them open it up in the parent’s name and making the contributions directly to that account.