You probably don’t need me to tell you that the cost of college can be an enormous burden on a college student and his or her family. Some fortunate students are in the envious position of having grandparents who have enough money to cover their own retirement years and still have something left to help family members pay for college. There are tax advantages for grandparents who help their grandchildren pay for college; however, coordinating the timing of various strategies is crucial for maximizing the benefit to the student.
A grandparent-owned 529 college savings plan can be an excellent planning tool for those who are willing and able to assist their grandchildren with college funding. Currently, $14,000 per year can be contributed to a 529 college savings plan without triggering a gift tax return. In addition, up to $70,000 can be contributed in a single year to a single beneficiary by using a special IRS rule that allows you to aggregate the gift over five years. When maxing out a single year 529 contribution, no subsequent gifts can be made during the next five years.
When filing the FAFSA college financial aid application, a grandparent-owned 529 is not counted as an asset in the Expected Family Contribution (EFC) calculation. However, when a disbursement is made from a grandparent-owned 529 plan, it is considered income of the student. It is not taxable income, but it will count as income on the following year’s FAFSA. President Obama recently signed an executive order that adjusted the way that distributions from grandparent-owned 529s impact a student’s future eligibility for financial aid. These new rules will take effect for the 2017–2018 school year. This change allows college students to use grandparent-owned 529 plans in both their junior and senior years without the distributions from these plans negatively impacting their opportunity for financial aid. Prior to this rule taking effect, grandparent-owned 529 plans could only be used primarily during the student’s senior year without an accompanying negative impact.
The bottom line is that grandparents who want to invest in their grandchildren’s college education have tools and strategies available to them. By careful planning and consideration of the payments’ timing, the students could receive valuable financial aid that might otherwise be missed.