want the best for their grandchildren, but sometimes
their good intentions can wreak havoc with a studentís
financial aid package.
could become less eligible for federal financial aid
when grandparents help them pay college expenses ó
even when the distributions come from 529 savings plans,
which are usually marketed as a tax-friendly way for
grandparents to help fill the college savings gap.
assets, including college savings plans such as 529
plans, must be reported on the (Free Application for
Federal Student Aid) when required," said Lynnette
Khalfani Cox, CEO of AskTheMoneyCoach.com and author of
"College Secrets: How to Save Money, Cut College
Costs and Graduate Debt Free."
fact, a failure to list a reportable asset on the FAFSA
is considered fraud. You must also list a variety of
income sources when required," she said. "But
how 529 plans are treated for FAFSA purposes depends on
who owns the plan."
plans are actually college savings trusts that are set
up under Section 529 of the Internal Revenue Service
code. Their primary benefit has to do with income taxes
on the accountís earnings. As long as the money is
used for qualified college expenses, a 529 plan is a
tax-free investment. Families can put aside up to
$14,000 per child each year and pay no taxes on the
money while itís growing and no taxes when they
withdraw the money to pay college bills.
to the College Savings Plans Network, there are 12
million 529 college savings plans open with $244 billion
that families have put aside for college costs.
a dependent student or a custodial parent owns a 529
plan, it must be listed as a parental asset on the FAFSA.
But any qualified distributions from the accounts are
ignored in the FAFSA formula, meaning those
distributions are not reported as income ó not to the
parent nor to the student.
an independent student owns a 529 plan, itís treated
as a student asset, but qualified distributions from the
account also are ignored in the FAFSA calculations.
itís a different story if a grandparent or another
relative or third party owns a 529 plan.
that case, that account is ignored as an asset
altogether," Cox said. "This means the 529
account does not have to be even listed on the FAFSA ó
not as a parent asset and not as a student asset.
ó from an income standpoint ó when a third party
owns a 529 plan, any qualified distributions from that
529 plan would be considered as untaxed income to the
beneficiary. This is why money taken out of a 529 plan
owned by a grandparent can, indeed, have serious
financial aid implications."
an illustration, Cox said, assume a studentís parent
owned a 529 plan and the student received a distribution
of $20,000 from the plan. Under FAFSA rules, this would
be counted as a parent asset, and at most a studentís
aid would be reduced by 5.64 percent, or $1,128.
if a grandparent owned the 529 plan, that $20,000 would
have to be reported as untaxed income and the studentís
aid could be cut by up to 50 percent of the distribution
amount, or $10,000.
makes no difference if the child were actually raised by
the grandparent, said Mark Kantrowitz, senior vice
president and publisher of the student financial aid
website Edvisors.com, based in Las Vegas.
the child is adopted by the grandparent, the grandparent
cannot provide their income and assets information on
the FAFSA instead of the parents," Kantrowitz said.
"If he is in a legal guardianship that was
court-ordered, then he is considered independent, in
which case the parentsí information is not required.
Otherwise, parent information is required even if he
doesnít live with them."
circumstances are sufficiently unusual, Kantrowitz said,
the student could appeal to an institutionís financial
aid administrator and request a so-called dependency
where this is successful typically include when both
parents are incarcerated or institutionalized, or their
whereabouts are unknown.
an independent status would allow the student to avoid
using parent information on the financial aid form.
Still, any support received from a grandparent must be
reported as untaxed income, including distributions from
a grandparent-owned 529 plan.
said there are ways to avoid having a grandparentís
contribution create a world of hurt for a student.
some savvy parents do, often on the recommendation of
financial advisers with expertise in college planning,
is to implement a two-fold strategy to maximize the
studentís financial aid," she said.
if a grandparent owns the 529 plan, they keep that asset
in the grandparentís name until after the FAFSA is
filed. That way it doesnít have to be reported as an
after the FAFSA is completed, the family will transfer
the 529 plan from the grandparentís name to the parentís
name," Cox said. "By transferring ownership,
the parent is now the account owner of the 529 plan, so
any distributions taken from it will not have to be
treated as income."