There’s good news for students who have financially generous grandparents. Beginning in the 2024-2025 academic year, grandparent-owned 529 college savings plans will no longer be a headache for students seeking federal financial aid.
Previously, distributions from such plans negatively impacted the student’s eligibility to receive needs-based financial aid, with the potential to reduce aid by as much as half of the distribution. For example, a student receiving a $50,000 distribution from a grandparent-owned 529 plan in any given year could reduce needs-based financial aid eligibility by as much as $25,000. This made it especially challenging for grandparents to provide meaningful financial support.
However, upcoming changes to the Free Application for Federal Student Aid (FAFSA®) are making grandparent-owned 529 plans more powerful than ever. Students will no longer need to disclose cash support and other types of income, including distributions from these accounts.
How Does the FAFSA® Work?
The FAFSA is an online form issued by the federal government. It is used to calculate eligibility for needs-based student financial aid, based on several pieces of information:
- The cost of attendance at the school (tuition, room and board, and other related expenses)
- The student’s Expected Family Contribution, or EFC. The EFC includes assets and earnings of the parents and cash support and income of the student. For further details on how EFC is determined, visit studentaid.gov.
Several types of needs-based federal student aid programs are available to students who qualify:
- Federal Pell Grant
- Federal Supplemental Educational Opportunity Grant (FSEOG)
- Direct Subsidized Loan
- Federal Work-Study
Grandparent-Owned 529 College Savings Accounts Are More Attractive Than Ever
In general, contributions to 529 college savings accounts offer several gifting and estate planning benefits for grandparents.
If you’re a grandparent, here are a few benefits to consider:
- Contributions to 529 college savings accounts are removed from the account owner’s taxable estate. Yet, the owner (the grandparent) maintains control of the account, including how the money is invested and distributed. The latter is especially important if the named beneficiary (grandchild) decides not to attend college or receives enough scholarships that the money in the account is not needed for college expenses. What’s more, grandparents have the option to change the beneficiary on the account at any time, and can even use the money for themselves, if necessary.
- Special forward gifting provisions allow a much higher level of contributions than the annual gift exclusion. For 2022, $16,000 is the annual exclusion for individual gifts made in a single year without gift tax. Now let’s compare this to the special forward gifting provision allowed for 529 plans each year: five times the annual $16,000 exclusion. When you do the math, this amounts to $80,000 for single filers and $160,000 for joint filers. Further, there is no limit on the number of beneficiaries for whom a grandparent can do this. For example, if a set of grandparents have two grandchildren, they can jointly contribute as much as $320,000 each year without tax.
Pulling It All Together
Changes to the FAFSA® form for the 2024-2025 academic year pave the way for grandparents to help more than ever with the high cost of college education. Grandparents can maintain these estate and gifting benefits without worrying that their financial support may hurt the chances of their grandchild receiving needs-based financial aid.
To learn more about whether funding a 529 college savings plan makes sense for your financial situation, please reach out to us at MPPL Financial for an initial conversation.
We have offices in Duluth, MN, Grand Rapids, MN, Wausau, WI and Crystal Lake, IL. While we’re located in the Midwest, we work with clients across the entire U.S.
Investment Advisory Services offered through Midwest Professional Planners, Ltd. (“MPPL”), 2610 Stewart Ave., Ste. 100, Wausau, WI 54401, 1-800-236-6775, an SEC-registered investment advisor. Certain representatives of MPPL are also registered representatives of, and offer securities products involving commission or transaction-based fees through APW Capital, Inc., 100 Enterprise Drive, Suite 504, Rockaway, NJ 07866, 1-800-637-3211. Member FINRA/SIPC/MSRB. MPPL is independent of APW Capital, Inc. Registration with the SEC or State Regulatory Authority does not imply a certain level of skill or expertise.