Big changes are coming to the Free Application for Federal Student Aid (FAFSA). Starting with the 2024-2025 school year, students will no longer have to disclose “cash support” used for education expenses. Instead, all data on student income will be taken from the student’s tax return. This is a game-changer.
Grandparent-owned plans have historically been considered cash support that counts toward student income. Since half of student income (exceeding $6,840) is considered fair game for college use according to the FAFSA eligibility formula, these grandparents plans have been criticized for creating big problems for students.
Not anymore. Grandparents are officially off the FAFSA grid. Now grandparents can take advantage of the gifting and estate planning benefits of a 529 account while also having peace of mind they aren’t accidentally sabotaging their grandchild’s financial aid eligibility.
Meanwhile, only up to 5.64% of parent-owned 529 plans are considered fair game for college use when determining eligibility for financial aid. That is a pretty good deal, but it nothing beats ZERO.
5 quick facts about 529 plans
A 529 plan allows people to save money for education with tax-deferred growth and tax-free withdrawals. They are one of the most powerful tools out there for college savers. But did you know…
1) They aren’t just for college. 529s can be used on qualifying educational expenses at eligible vocational and trade schools. Families can also use them to pay for up to $10,000 in tuition expenses at elementary and secondary public, private, or parochial schools. The SECURE Act further expanded the scope of 529 plans to be used for apprenticeship programs and the repayment of student loan debt.
2) Anyone can open a plan and contribute. If you have a Social Security number and a permanent address, you can open a 529 and name a beneficiary. There are no contribution minimums or income requirements. Once the plan is open, anybody can contribute.
3) There are contribution maximum limits. A common misconception of 529s is that a plan has no contribution limits. However, states impose limits that vary each year. We can help you figure out what your 2022 limits are. Parents have started “crowd-sourcing” their children’s education savings by encouraging family to contribute as a birthday or holiday gift. This is great, just make sure family members don’t accidentally overfund the account.
4) The beneficiary does not control the money. The account owner (aka. the person who opened the account) has complete legal ownership of the money in the plan, even after the beneficiary turns 18 years of age. Beneficiaries can switch, but account owners cannot. There are upsides and downsides to who owns the account–read more about this on the back page of the newsletter!
5) You can open a plan in another state. You can use a 529 plan from any state to pay for eligible schools in any state. However, some states offer special financial aid benefits for students who have a 529 plan in the state, such as not counting the plan as an asset when determining eligibility for state grants and other state aid.
If you are interested in opening a 529 plan for your grandchildren, we can help. Call the office!