What Grandparents Should Know About Opening 529 Accounts

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What Grandparents Should Know About Opening 529 Accounts

Find out whether a grandparent's 529 plan will affect their grandchild's ability to secure additional financial aid.

I opened a 529 account for my granddaughter. Will this affect her prospects for financial aid?

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A grandparent-owned 529 is not reported as either a parent or student asset on the Free Application for Student Financial Aid (FAFSA). That can be a big advantage because parents are expected to contribute up to 5.6% of their assets toward the college bills, according to the federal financial aid formula, and students are expected to contribute 20% of assets. As soon as the money from the grandparent-owned account is distributed, however, it is considered student income and must be reported as such on the next year's FAFSA, says Deborah Fox, president of Fox College Funding in San Diego. Students are expected to contribute 50 cents of every dollar of income toward the college bills, after an allowance of about $6,000 (the CSS Profile, a financial aid application used by some private schools, also assesses student income but does not provide an allowance). The same is true for 529 withdrawals from accounts owned by anyone who isn't the parent -- whether it's a grandparent, another relative or a friend.

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Families who expect to qualify for need-based aid should time the withdrawals from that 529 until the last financial aid form has been filed, after January 1 of the student's junior year of college, says Fox. That way, the distribution won't affect the award. If you need to access the account before then, she recommends switching the account owner from the grandparent to the parent, if the plan allows it. (If it doesn't, you can transfer the account to another state's plan that does; see SavingforCollege.com for each state’s rules). Either way, the money in the 529 would be counted as the parents' assets, but the withdrawals would not be reported as income on the financial aid application.

For more information about the financial aid process, see 7 Pitfalls to Avoid When Paying for College, Financial Aid Strategies With a Catch and Cracking the Financial Aid Code.

Got a question? Ask Kim at askkim@kiplinger.com.