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:
- Change the account owner to the parent. If the funds in the grandparent-owned 529-plan are needed during the early years of college, this strategy reduces the amount subject to the student’s Expected Family Contribution from 50 percent of the distribution to up to 5.64% of the account’s value.
- Rollover one year’s worth of funds to a parent-owned 529 plan. For this strategy to work, it’s important for a) the rollover to occur after the student files the FAFSA, so that the funds are not reported as asset on application and 2) funds are spent before next application period. This strategy requires parents and grandparents to own plans in the same state in order to avoid any state recapture rules.
- Delay the distribution. Remember, the FASFA has a 2-year look back period. So by waiting until the student has two years of school left to distribute from the grandparent-owned plan, these funds will not be included in the application. This strategy essentially mitigates the risk of increasing the students Expected Family Contribution during the last two years of the FASFA process.
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 to help you plan for and make the best possible decisions about this important investment with confidence.
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