In order to accurately answer the question of how your grandparent’s 529 plan will impact your financial aid, we need to break this up into two parts. They are the 529 plan and the subsequent 529 distributions.
Schools that require the Free Application for Federal Student Aid, or FAFSA, do not require that you report grandparent owned 529 accounts. For families that are eligible for need-based aid this can prove valuable as the 529 plan will not be included in the financial aid calculations.
Distributions from grandparent-owned 529 plans is a completely different story.
Any distribution from a grandparent owned 529 plan is considered “untaxed income” of the student. As a result, it's assessed at a rate of 50% of the student’s income above their $6,260 income allowance. Paying the school directly or making a gift to the child does not change anything. This can dramatically impact a student’s need-based financial aid and is something that parents should be well aware of.
That being said, having a 529 plan in the grandparents name can provide many benefits. We already stated that the plan assets will not be included in the FAFSA calculation.
Schools that require the CSS Profile do report 529 plans where the student is the beneficiary, so be aware of which schools require which applications. Proper timing can also negate the impact of plan distributions on financial aid. Under the new Prior, Prior rules 529 distributions in the student’s junior or senior year of college will have zero impact in the aid calculation, provided they don’t attend graduate school.
As you can see, understanding how schools determine financial aid eligibility can prove valuable.
But this is just one part of college planning. A comprehensive strategy should also cover college selection, tax aid and the best use of your personal resources. Is your current advisor providing coordinated guidance in these areas? If not find someone who can. With some private schools now costing nearly $70,000 a year you can’t afford not to.
(Our goal here is to help you develop your best college planning strategy by addressing the topics of tax planning, financial aid optimization, college selection and personal finances. If you have a question please send it our way.)