I got a question this week from a mom about grandparent contributions to college. It’s great to have generous grandparents who want to help with college costs, but you don’t want any gifts to backfire.
Here are five things to keep in mind when grandparents want to help with college:
If your family isn’t going to qualify for need-based financial aid, it doesn’t matter how grandparents save for college or how they help pay the tab. It can, however, be an issue for families who are worried that a grandparent’s generosity could shrink their financial aid package.
If financial aid is an issue, grandparents should ideally wait to kick in money until after the family has filed for financial aid in the spring of a child’s junior year in college.
Why then? Because this represents the last financial aid application the family will submit. After that form is completed, a college will no longer ask about a family’s finances.
What about grandparents saving through 529 college plans? This money is not counted as an asset when parents fill out the Free Application for Federal Student Aid or FAFSA. Families must fill out this form if they want to qualify for need-based aid.
There is, however, a catch. When grandma withdraws money from the 529 plan to use for her grandchild, parents must report this money as untaxed income on the FAFSA. This income can reduce aid eligibility by as much as half of the cash withdrawn from the college account. Not good!
To avoid the above 529 disaster, tell grandma to wait and withdraw the money after the parents have filed that last financial aid form in the spring of the child’s junior year of college.
Or grandma could sink the money into a 529 plan that the grandchild’s parents own. For financial aid purposes, this money is accessed much more favorably at a maximum parental rate of 5.64%.
Beware: If your child is interested in private colleges that use the CSS/Financial Aid PROFILE, these institutions can ask about the existence of any college accounts that name the student as a beneficiary. Here is the list of schools that use the PROFILE.
Also, what about if grandparents are on the older side and probably won’t be alive by the time the grandkid is a junior in college? Is a 529 plan in the parents name the best bet?
You write, “To avoid the above 529 disaster, tell grandma to wait and withdraw the money after the parents have filed that last financial aid form in the spring of the child’s junior year of college.”
What if there is a younger child in college? Will that withdrawn money count as the graduating student’s asset, or as the parents’?
Thanks for this post — very helpful.