How to get more money without reducing need awards
Beginning in 2023 there is a new way to save money for college that won't impact your student’s ability to qualify for financial aid. This change is in the 529 college saving program and is a change that every parent, grandparent, or friend of a future scholar should know.
Simply put, grandparents can now open up 529 savings plans without hurting the student’s ability to get financial aid!
529 college savings plans provide a way to contribute after-tax money into an account designated for a beneficiary (the student). The plan is controlled by the account holder on behalf of the student, so there is little risk that the funds won't be used as intended for education. As the deposits grow over time, any gains on the deposits are tax-free as long as they are used for qualified educational expenses. Even better, these funds can be used for both college and K through 12 qualified expenses. Funds not used for education will be subject to ordinary income taxes AND a 10% penalty.
While anyone can open a 529 savings plan for a future student, any time a distribution was made to the student from a non-parent account, that distribution used to be treated as untaxed income to the child. Up to 50% of this distribution could impact the student’s ability to receive other aid through the Free Application for Federal Student Aid (FAFSA). On the other hand, if the account is in the parent’s name, the reduction in aid eligibility is maxed out at 5.64%!
The new opportunity
It appears now that a grandparent (or potentially any non-custodial parent or friend) can open up a 529 savings plan without it hurting the future student’s ability to get federal aid. In the eyes of the new FAFSA, this funding is now virtually invisible to them as they calculate a student’s financial needs because they are no longer asking the questions about the grandparent’s contributions. So not only will the assets in the 529 account be ignored, but the distributions from the 529 account will also not influence the FAFSA results.
If you are considering this option to help fund the ever-increasing cost of college, here are some considerations and ideas:
Given the ever-increasing cost of college, now is a great time to have more advocates helping to save for future educational expenses. These extra savings could make a big difference in reducing your student’s future debt obligations.
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Mia Verc, CPA; Janice Papais, CPA
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