In recent years, the number of grandparents contributing to 529 plans has risen substantially. According to a study by the College Savings Foundation, nearly 40% of grandparents are now contributing to their grandchildren’s 529 plans.
This generosity stems from a desire to ease the financial burden on their children and grandchildren, ensuring that the next generation has access to higher education without being saddled with overwhelming debt.
Grandparents often contribute significant amounts to these plans. In fact, Fidelity's 2023 College Savings Indicator study revealed that grandparents' contributions account for approximately 25% of the total funds in 529 plans. With rising tuition costs and the increasing need for advanced education in a competitive job market, these contributions are more valuable than ever.
The Financial Aid Implications of Grandparents' 529 Accounts
While grandparents' contributions to 529 plans are immensely beneficial, it’s important to understand how these accounts are treated when it comes to financial aid. The federal financial aid system, governed by the Free Application for Federal Student Aid (FAFSA), has specific rules regarding 529 plans owned by grandparents.
- Ownership Matters: 529 plans owned by grandparents are not reported as assets on the FAFSA, which can be advantageous when calculating a student's Expected Family Contribution (EFC). This means that during the initial assessment, the assets in a grandparent-owned 529 plan won't directly reduce a student's eligibility for need-based aid.
- Impact of Withdrawals: However, the key point to note is how distributions from grandparent-owned 529 plans are treated. When money is withdrawn from these accounts to pay for the grandchild's education expenses, it is considered untaxed income to the student on the following year's FAFSA. This can significantly impact the student's financial aid eligibility, potentially reducing their aid package by as much as 50% of the distribution amount.
- Strategic Planning: Given this, families should consider a strategic approach to using funds from grandparent-owned 529 plans. One common strategy is to delay using these funds until the student’s junior or senior year in college. By this time, the student would have already filed their last FAFSA, meaning the income from the 529 distribution won't affect their financial aid eligibility.
Please reach out to us with any questions that you may have about how you might work 529 College Savings into your overall financial plan.
- Arise Private Wealth, South Bay Financial Advisors
