A recent rule change can make a 529 plan even better for you and your family
As a grandparent, you may be helping your grandchild pay for college with a 529 college savings plan. While the 529 plans owned by grandparents (nonparents) don’t count in calculating financial aid for students, the distributions from these plans may impact the amount of income your grandchild has to report on the Free Application for Federal Student Aid (FAFSA). Note that qualified distributions from 529 plans for higher education are income-tax free.*
Currently, if a grandparent owns a 529 account and uses it to pay for a grandchild’s college, the amount distributed will count as student untaxed income in the year of the distribution (called the base year), reducing the amount of need-based federal aid the student is eligible to receive for the next school year. Right now, the FAFSA asks families to report student income from the prior calendar year.
Any financial support that doesn’t come from a parent can reduce a student’s need-based aid by up to 50% of the value of student income reported on the FAFSA form. To avoid this penalty, a grandparent may wait until the student’s final year of school (when there are no additional FAFSAs to complete) to make a 529 distribution.
New rules mean more time to help pay for college
Rule changes announced in late 2015 will allow a grandparent to use 529 assets a year earlier without impacting the student’s eligibility for financial aid. Under the new rules, which go into effect in the 2017–2018 school year, the base-year income on the FAFSA will reflect the student’s income from two years prior rather than one. If a student fills out the FAFSA for his or her senior year, base-year income will reflect income received during his or her sophomore—not junior—year.