If you apply for financial aid through the U.S Government (fafsa.ed.gov) you will be filling out a FAFSA (Free Application for Federal Student Aid) form and you will want to consider who should be the account owner for the 529 plan.
In regards to financial aid based on the FAFSA form, the form does distinguish between parents and grandparents in the following way:
- If a 529 college-savings plan is owned by a dependent student or by a dependent student's custodial parent, it is reported as a parent asset on the FAFSA. Distributions are ignored.
- But, if a 529 plan is owned by anybody else, such as a grandparent, aunt, uncle, cousin or non-custodial parent, it is not reported as an asset on the FAFSA. Instead, distributions count as untaxed income to the beneficiary.
The important question is “how much effect” does asset vs distribution have on the FAFSA:
- If the 529 plan is reported as a parent asset on the FAFSA, it will reduce eligibility for need-based aid by as much as 5.64% of the asset value.
- Distributions from a 529 plan owned by anyone else will reduce eligibility for need-based aid by as much as 50% of the amount of the distribution!
Bottom Line: the 529 plans that are in a grandparent’s name will not show up on the FAFSA in the “parental asset or resources” section. However, if distributions are made from the account while the child is in school, they will be considered “income” and may have a large effect on the FAFSA form. Based on this information and depending on your specific goals and situation for these monies, you may want to make sure all 529 plans are in the name of the child’s parents. (Anyone can still contribute to a child’s 529 plan.)
Source: Savingforcollege.com and IRS.gov.
If you reside in Florida, read our college-saving options for Florida residents post.