A New Aspect to the FAFSA Process Allows Grandparents to Contribute to College Expenses Without Impacting Financial Aid Eligibility
In a significant development, the Free Application for Federal Student Aid (FAFSA) process now permits grandparents to assist with college expenses through 529 college savings plans without negatively affecting the student’s eligibility for financial aid. Previously, any money distributed from these grandparent-owned accounts would be considered untaxed student income on the FAFSA, potentially reducing the student’s aid. However, a recent simplification of the FAFSA form has introduced a “Student Aid Index” for estimating a family’s financial contribution, drastically reducing the number of questions from 108 to less than 50. As a result, income from grandparent-owned 529 accounts no longer needs to be reported, eliminating the substantial penalty on student aid for such distributions.
This adjustment holds particularly significant benefits for middle-income families. The simplified FAFSA process now ensures fewer penalties for savings and potentially raises eligibility for financial aid. Financial advisors, such as Michael Green from Apollon Wealth Management, are encouraging their clients to consider utilizing grandparent-owned 529 plans as part of their college funding strategy. However, Green does caution that this approach involves transferring control of the funds, which necessitates agreement and trust within the family. Furthermore, ownership of these accounts can impact grandparents’ eligibility for Medicaid, making it a crucial factor in financial planning.
While the concept of utilizing third-party 529 plans is not entirely new, with financial aid consultants like Kalman Chany acknowledging that strategic planning around these plans has always existed, the updated FAFSA process presents a more structured pathway for grandparents to contribute to their grandchildren’s education without negative consequences for financial aid. Chany also advises caution, noting that contributions from grandparents may still be taken into account for nonfederal institutional aid decisions made by colleges through the CSS profile. This highlights the importance of careful planning for families, even with the new FAFSA rules in place.
The ability for grandparents to assist with college expenses through 529 college savings plans without impacting financial aid eligibility marks a significant development in college funding strategies. With the simplified FAFSA process, middle-income families now have greater potential to access financial aid, while financial planners continue to emphasize the importance of careful financial planning and understanding the potential implications on Medicaid eligibility. As college education costs continue to rise, leveraging the benefits of grandparent-owned 529 plans provides a viable solution for families seeking to alleviate the financial burden of higher education.
Analyst comment
Positive news. The new FAFSA process allows grandparents to contribute to college expenses through 529 plans without affecting financial aid. Middle-income families benefit the most as this simplification reduces penalties on savings and could increase eligibility for aid. Financial advisors recommend this strategy, but caution about transferring funds and the impact on Medicaid eligibility. Careful planning is still necessary as contributions may be considered for nonfederal institutional aid decisions. Grandparent-owned 529 plans offer a solution to the rising costs of education.
