Ask an expert: How do grandparent-owned 529 plans affect financial aid eligibility?

http://www.savingforcollege.com/articles/ask-an-expert-how-do-grandparent-owned-529-plans-affect-financial-aid-eligibility-749

Senior Analyst, Savingforcollege.com.

How do grandparent-owned 529 plans affect financial aid eligibility?

A 529 plan owned by a grandparent is not reported as an asset under the Free Application for Federal Student Aid (FAFSA). This does NOT mean it has no effect on financial aid for the student. Withdrawals taken and used for the beneficiary’s qualified higher education expenses will be treated as untaxed income. This will have to be recorded on your FAFSA application the next year and can reduce the child's aid package by up to 50% of the distribution amount, nearly ten times harsher than a parent-owned 529!

There are ways to plan around this however. Obviously, if the family is not planning on applying for financial aid, or is phased out due to their income, this is not a problem. A frequently-used solution is to change ownership of the plan to a parent before the child attends college. Be sure your plan allows for a change of ownership, as not all do. If your plan does not, you can roll over the assets to a plan that does and transfer ownership at that time. But be careful if you have been taking tax deductions from your current plan, as transferring assets to another plan might subject you to tax recapture. The last solution is to wait until the final year of college to take a distribution from the grandparent-owned account. Since the beneficiary will not need to apply for financial aid the next year, there will be no negative impact.

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