This Change to The FAFSA Rules Could Help Your Grandkids Qualify for More Student Aid

Ali Katz

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Want to contribute to your grandchild’s future college education? The FAFSA Simplification Act, which went into effect last month, now makes it possible for grandparents to do even more to help finance their grandchild’s education.

In the past, any contributions or distributions from a grandparent's 529 college savings plan were subject to FAFSA reporting, potentially impacting the student beneficiary's eligibility for federal financial aid. The new changes, however, bring a breath of fresh air. 

In this blog, you’ll learn what has changed under the new rule and how grandparents can leverage it to support their grandchild's educational pursuits.

 

Understanding the 529 Account

First things first – what exactly is a 529 college savings account? It's a special savings account designed to help individuals, including grandparents, set aside money for future college expenses. Contributions aren't federally tax-deductible, but the good news is that earnings within the account grow tax-free. When funds are withdrawn for qualified education expenses, they remain untaxed.

 

What The New Rule Changes

When the account owner is a dependent student or custodial parent, the total value of the 529 plan is reported as an investment asset on the Free Application for Federal Student Aid (FAFSA). Previously, if a grandparent owned the 529 plan, any distributions were considered untaxed income for the student, potentially affecting financial aid eligibility. The upcoming change eliminates this concern.

In a nutshell, a 529 plan owned by a grandparent will no longer require reporting on the FAFSA. Even more impactful is that distributions from this grandparent-owned 529 plan will not be deemed as untaxed income for the student. This opens up opportunities for grandparents to contribute to their grandchild's education without jeopardizing financial aid eligibility.

 

Maximizing Grandparent Contributions

It’s important to keep the following in mind when you make contributions to a 529 account for a grandchild:

 

1 | Funds Must Be Used For Qualified Educational Expenses

Grandparents can use 529 plan funds for a range of qualified educational expenses, including tuition, room and board, books, supplies, laptops, and internet access. However, certain expenses like insurance, student health fees, transportation, and extracurriculars are not covered and may incur a ten percent penalty if 529 plan funds are used toward these expenses.

 

2 | The Annual Gift Exclusion

While grandparents can contribute to their grandchild's 529 plan, it's essential to be mindful of the federal annual gift exclusion, which is the amount of money a person can gift to someone else without needing to file a gift tax return. The limit currently stands at $18,000 for an individual and $36,000 for those filing jointly with a spouse. A special rule allows gift givers to spread larger one-time gifts across five years to stay within their lifetime gift exclusion.

 

3 | Reconsider Payments Made Directly to The School

Distributions directly paid to the school from grandparent-owned 529 accounts will not affect aid eligibility. However, for now, it's recommended to pay the grandchild directly.

 

4 | Timing Matters

When withdrawing funds from the 529 plan, it's crucial to do so within the same tax year as the educational expenses. This strategic move ensures smooth financial transactions and adherence to tax regulations.

 

5 | Watch Your Withdrawal Limits

The amount withdrawn from all 529 plans should be no more than the total cost of the qualified educational expenses billed by the school. Excess withdrawals may incur a 10 percent penalty, but there's a 60-day window to rectify the situation without penalties.

 

Helping You Plan For Your Family’s Future In The Most Loving Way Possible

It's a heartwarming prospect to be able to help shape a brighter future for the younger generation. By understanding the new FAFSA rule and strategically utilizing 529 plans, you can contribute meaningfully to your grandchild’s education without compromising financial aid opportunities. This makes a 529 account an even better investment tool that not only helps your grandchild afford their education but leaves behind a legacy of love and wisdom.

At our firm, we believe this is what estate planning is all about – your Life & Legacy. That’s why we refer to estate planning as Life & Legacy Planning. It isn’t just about making a plan for what happens to your assets when you die – it’s about making meaningful, heart-centered decisions that provide peace, love, and guidance to the ones you love today and for years to come in the future.