Grandparents

Does a 529 plan count against eligibility for financial aid?

Simply owning a 529 account for your grandchild will not affect your grandchild's eligibility for need-based financial aid, but actually using the account could have a negative impact in the subsequent year.

The value of assets owned by a grandparent (or other non-parent) is not reportable on the FAFSA financial aid application. This rule extends to 529 plans owned by grandparents.

However, if a grandparent provides any type of financial support to the student, that support is reportable on the following year's FAFSA as student income. The financial aid formula counts student income just as it counts student assets (although the assessment percentages and allowances are different). Most financial aid offices interpret the rules as requiring distributions from grandparent-owned 529s to be included as student income, even when the distributions are not reportable for federal income taxes (i.e. they are tax-free).

If a grandparent were to use the 529 account only to pay for the final year in college, then the income rule would not make any difference, since the student will not be applying for financial aid for the following year.