Who should own a 529 plan: parents or grandparents?

Clients with children and grandchildren often ask us about the best way to make the most of a 529 plan – particularly as it relates to ownership of the account.

As you know, a 529 plan is an attractive tax-advantaged way to save and pay for college expenses including tuition and books. However, decisions about account ownership and timing of the distributions can make all the difference in qualifying and maximizing needs-based federal student financial aid.

How students apply for needs-based financial aid

If a college offers federal needs-based financial aid, then the student must complete the Free Application for Federal Student Aid (FAFSA) to apply for it.  Colleges rely on the information provided in this application to determine a student’s Expected Family Contribution.

The FAFSA application process begins in October 1 of each year. FASFA has a 2-year look-back for colleges to review income and assets when considering the aid package they will offer.  

How are parental assets considered in college financial aid decisions?

Up to 5.64% of family assets, including any 529 accounts they own, are included in the determination of the student’s Expected Family Contribution.

For example, a parent-owned 529 account with a $100,000 balance can increase the student’s Expected Family Contribution for the upcoming year by $5,640.

How are grandparent-owned 529-assets considered in financial aid packages

Grandparent-owned 529 plans are not considered in the FAFSA until actual distributions are made.  In such instances, up to 50% of distributions from a grandparent owned 529-plan are considered in aid decisions by colleges.

For example, if a grandparent owned 529 plan had a value of $100,000, and the grandparent decided to make a $25,000 distribution to the grandchild, then this distribution can increase the Expected Family Contribution for the upcoming year by $12,500.

If the distribution were higher (e.g. $50,000) then it could increase the Expected Family Contribution by $25,000.

Making the most of college planning strategies to managing the financial aid process

On the surface, it seems like it’s not a good decision for grandparents to fund a 529-plan. However, that’s not necessarily the case.

Fortunately, there are planning strategies that provide a way for families to maximize the benefits of grandparent owned 529-pans without negatively impacting needs-based federal student financial aid.

While each family’s situation is different, here are three strategies to consider:

Creating a college planning strategy that works for your student

How one pays for college is complicated. Given the magnitude of the expense, it’s important to thoughtfully chart a course to make the most of available financial aid and family assets.

We look forward to working closely with you help you plan for and make the best possible decisions about this important investment with confidence.

For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure and Part 3 Form CRS, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000.Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.