Will grandma’s 529 plan hurt students’ chances of financial aid?


Q. We have been funding our granddaughter’s college fund almost since birth. He now has $ 100,000 and has two more years of high school in which we plan to continue contributing to the account. She is a very good straight A student and is considering applying for scholarships to help with college. A financial advisor just told us to stop funding the college account as it will drastically reduce their ability to get a scholarship. Is it true? Did we do a wrong thing by creating this account?

– Grandmother’s dilemma

A. Family members often put money into a college fund for a loved one, but they don’t always realize that these accounts can have a impact on financial aid.

The first thing to consider is the type of account you have created for your granddaughter.

If it is a deposit account, For financial aid purposes, assets are treated like student assets, regardless of who owns the account, said Victor Cannillo, founder of Baron Financial Group at Fair Lawn.

Therefore, it could have a big impact on their eligibility for financial aid.

There might be some good news if you’ve funded a 529 plan.

“529 plans that are in a grandparent’s name will not appear on the Free Application for Federal Student Aid (FAFSA) in the“ Parental Assets or Resources ”section,” Cannillo said. “However, if any distributions are made from the account while the child is in school, they will be considered ‘income’ and may have a significant effect on the FAFSA form.”

Cannillo said financial aid based on the FAFSA form distinguishes between 529 plans owned by parents and grandparents.

“If a 529 Education Savings Plan is owned by a dependent student or a parent with custody of a dependent student, it is reported as an asset parent on the FAFSA. Distributions are being ignored, ”he said. “But if a 529 plan belongs to someone else, like a Grand parent, aunt, uncle, non-custodial parent, etc., it is not reported as an asset on the FAFSA. Instead, the distributions count as tax-free income for the beneficiary.

The important question is “what effect” the plan as an asset versus obtaining distributions has on the FAFSA.

If the 529 plan is flagged as a parent asset on the FAFSA, it can reduce eligibility for need-based assistance by up to 5.64% of the asset’s value, according to SavingForCollege.com. Distributions from a 529 plan owned by someone else – such as a grandparent – will reduce eligibility for need-based assistance by up to 50% of the amount of the distribution.

“Based on this information and depending on your specific goals and circumstances for these funds, you may want to make sure that the 529 plans are on behalf of the child’s parents,” he said. . “Anyone can always contribute to a child’s 529 plan. “

You also noted that your granddaughter may be a Fellow Student.

Cannillo said that there are many types of scholarships that have their own restrictions and guidelines, so you would want to look at them specifically.

“University scholarships are not affected by income, but only by need-based financial aid,” he said. “It would also be prudent to check with the specific college or university that they plan to study to review their financial aid policies.”

Email your questions to [email protected].

Karin Price Mueller writes on Bamboo column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com‘s weekly electronic newsletter.