Some pending changes to the FASFA (Free Application for Federal Student Aid) represent very good news for grandparents and their college-bound grandchildren…..
Effective beginning the 2024-2025 school year, grandparent-owned 529 accounts won’t negatively impact students’ eligibility for financial aid. Since the FASFA uses tax information from two years prior to the application, the rule change will apply to 2022 information.
How things are now:
Since up to 50% of annual student income is eligible for college use, grandparental assistance , which adds to student “income”, has been considered a “financial aid trap”. Grandparents can gift up to $16,000 to the student’s parents, and the FASFA will count this as a parental asset.
Grandparent-owned 529 accounts do not have to be disclosed as assets on the FASFA. However, once distributions are taken from grandparent-owned accounts and used for education expenses, those dollars must be shown as student income on future FASFAs.
Grandparents can gift money to the parents of the students (up to $16,000 per student per year). The money becomes a parental asset rather than a student asset, with less required to be spent towards education expense..
The welcome change:
Under the new way of doing things (as a result of the Consolidated Appropriations Act of 2021), all student income data will be taken directly from the student’s and/or parents’ tax returns and will not need to include contributions from grandparents.
At Geyer Law, we often include 529 plans in our discussion of gift and estate planning with clients who wish to help their children and grandchildren while benefitting themselves. In fact, 529 plans (even before the change) offer many benefits to the grandparents themselves:
1. When grandparents contribute to a 529, they are removing assets from their own taxable estates. At the same time, they continue to have control of the account, even changing the beneficiary if they wish to do so.
2. The law allows contributions of up to five times the annual gift tax exclusion to be made in one year. Grandparents may thus contribute up to $80,000 for each beneficiary (up to $160,000 all in one year for joint filers).
3. Grandparents can maintain control over the account, knowing that if an emergency arises in their own lives, they can use the assets for their own needs.
529 accounts, very good for grandparents, are about to get even better when it comes to helping grandkids get an education.
– by Cara Chittenden, Associate Attorney at Rebecca W. Geyer & Associates