Victor Cannillo is quoted on this topic in an article on NJMoneyHelp.com by Karin Price Mueller, originally published on July 30, 2020.
A 90-second read by Victor Cannillo: If you are a grandparent who has set up a college-savings plan for your grandchild, you may be concerned as to how it could affect their financial aid eligibility. Here are some things to consider. What type of account did you set up for your grandchild? If it is a custodial account, for financial aid purposes, the assets are treated as the student’s assets regardless of who owns the account. Therefore, it could have great impact on their financial aid eligibility. If it is a 529 plan that is in a grandparent’s name , it will not show up on the Free Application for Federal Student Aid (FAFSA) in the “parental asset or resources” section. However, if distributions are made from the account while the child is in school, they will be considered “income” and may have a large effect on the FAFSA form.
Financial aid based on the FAFSA form does distinguish between parent and grandparent-owned 529 plans in the following way:
- If a 529 college-savings plan is owned by a dependent student or by a dependent student's custodial parent, it is reported as a parent asset on the FAFSA. Distributions are ignored.
- But, if a 529 plan is owned by anybody else, such as a grandparent, aunt, uncle, non-custodial parent, etc., it is not reported as an asset on the FAFSA. Instead, distributions count as untaxed income to the beneficiary.
- The important question is “how much effect” does asset vs distribution have on the FAFSA. According to Savingforcollege.com, if the 529 plan is reported as a parent asset on the FAFSA, it can reduce eligibility for need-based aid by as much as 5.64% of the asset value. Distributions from a 529 plan owned by anyone else (like a grandparent) will reduce eligibility for need-based aid by as much as 50% of the amount of the distribution.
- Based on this information and depending on your specific goals and situation for these monies, you may want to make sure all 529 plans are in the name of the child’s parents. (Anyone can still contribute to a child’s 529 plan.)
Obviously, there are many kinds of scholarships out there which can have their own restrictions and guidelines so you would want to review those specifically. Academic-based scholarship is not affected by income, only need-based financial aid. It would also be prudent to check with the specific college or university they plan to attend to review their financial aid policies.
Sources: Savingforcollege.com, Finaid.org & Irs.gov.
If you have any further questions, please reach out to your Baron Team.
Disclosure: This material is not intended to be relied upon as a forecast, research, tax or investment advice. Please consult your financial planning and tax professional for personal advice.