Grandparent 529: How a FAFSA change makes it more appealing
Updated: Oct 9
“The first thing we do, let’s kill all the lawyers” – William Shakespeare, Richard VI, Part 2
With students back on campuses, it’s time to reflect on the most important lessons we learned in college. For some, how Shakespeare explains humanity. For others, how the laws of physics explain the world. For future lawyers, how pedantic attention to fine print can let you twist small technicalities to your advantage.
Today, we embrace our inner lawyer.
Today, we embrace the Grandparent 529.
When rules change, new opportunities are born. Nowhere is this more true than in personal finance. Cedar Peak stays on top of rule changes and figures out how clients can use them to their advantage -- or at least minimize any downside from them.
This year, the Free Application for Federal Student Aid (FAFSA) changes. The main point of the FAFSA is to calculate the amount of money a family is expected to contribute to a year of a college. Generally speaking, the lower the expected family contribution (EFC), the more financial aid a student is eligible to receive. The EFC is mostly a factor of income and assets – for both the student and the parents.
If you are sending kids to college, your financial advisor should try to find ways to reduce your student’s EFC. This maximizes a student’s chances for scholarships, grants, or loans. These tactics generally revolve around 3 strategies:
Reducing reportable income
Reducing non-retirement assets
Shifting assets and income from the student to the parents
FAFSA is simplified for the 2024-25 school year, with 2/3 of existing questions scheduled to be removed. One of the changes opens up an interesting planning opportunity.
Enter the Grandparent 529 Plan
Starting this year, distributions from 529 plans owned by grandparents aren’t reported on the FAFSA. If a grandparent used their 529 to pay for a grandchild’s tuition, it used to be considered non-taxable income to the student on FAFSA. That meant $10,000 of distributions from the grandparents’ 529 could increase EFC by almost $5,000 that year.
But now, grandparents’ 529s don’t impact the family’s EFC since neither the assets nor the distributions from it are on FAFSA. If grandparents want to help pay for college, it might make sense for them to open their own 529 for the kids.
This strategy may not be appropriate for everyone. You’ll want to check with your financial advisor. It is another way to avoid the not-quite-Shakespearean tragedy that comes with not thinking about tomorrow and tomorrow and tomorrow. But the first thing we do, let’s kill all the lawyers.