There’s some big news in 2022 for grandparents owning 529 college savings plans for their grandchildren.
For those that don’t know, a 529 Plan is a college savings account that allows money to grow tax free and be withdrawn tax free when used to pay qualified education expenses. Inside the 529 plan, many include investments designed for growth, which can be substantial over the 18 years before a newborn is off to college. Sounds like a pretty good deal, right?
These rules on the taxation of investment growth apply to both parent owned 529 plans for their children and grandparent owned 529 plans for their grandchildren. The difference when it came to ownership has been on the impact on financial aid which has differed based on the source of the plan in past years.
In past years, parent owned 529 plans were counted as a parent asset on the Free Application for Federal Student Aid (FAFSA). Parent assets can reduce a financial aid eligibility by up to 5.64% of the accounts value.
Grandparent owned 529 plans were not counted as a parent or student asset on the FAFSA in the past but were rather reported as untaxed student income. Untaxed student income can reduce a student financial aid eligibility by up to 50% of the account value.
This is changing in 2022 as a result of a new updated FAFSA form for this year. Under the new rules, the updated FAFSA will not require students to report cash support from outside sources. This means that while parent owned 529 plans will still reduce financial aid eligibility by up to 5.64% of the account value, grandparent owned 529 plans will not have an impact on the student’s financial aid.
529 plans can cover more than just the cost of tuition. Proceeds from these plans can also cover books, computers, private K-12 tuition for up to $10,000 and even student loans for up to $10,000 after graduation. This versatility adds to the reasons of why 529 plans are some of the most common locations for college savings.
While these changes to grandparent 529 plans for this year are big news, it should be noted that these changes have been made to the FAFSA only and will not have an impact on the CSS Profile, another form that is used to calculate financial aid eligibility. The CSS Profile is used by many private schools, and students submitting financial aid forms at CSS Profile schools will continue to include student untaxed income as part of their calculations.
If you have questions about how these upcoming FAFSA changes may impact your situation, feel free to reach out. I’m happy to help.
All the best,
Andrew Holmes, Certified College Planning Specialist™