How Grandparent College Savings Affects Financial Aid

I have had lots of phone calls from grandparents wanting to help save for their grandchildren's college education. And you may remember our story on one grandfather's commitment to help pay for his grandchildren's college costs. There is so much sentiment of love and caring for not only the grandchildren but the children too. The grandparents have the desire to ease their child's burden of paying for higher education. Why the calls to me though? There is some confusion on how this assistance from grandparents will affect the financial aid that the grandchild can receive.

Here is what I share to bring light to the situation:

The Basics

A grandparent simply owning a 529 account for a grandchild will not affect the grandchild's eligibility for need-based financial aid, but actually using the account could have an impact in the future.

How It Works

The value of assets owned by a grandparent (or other non-parent) is not reportable on the FAFSA^® financial aid application. However, if a grandparent provides any type of financial support to the student, including the use of the 529 account to help pay the college bill, that support is reportable as student untaxed income on the FAFSA. Student income (both taxable and untaxed) is taken into consideration when a student's financial aid eligibility is assessed. Thus, a contribution from a grandparent's 529 account could affect the student's financial aid.

A Workaround

Student income in a certain year is only considered on a FAFSA two years in the future. Therefore, if a grandparent were to use the 529 account only to pay for the final five semesters of college costs, the student's financial aid eligibility would not be affected, as the student's income during that time would not appear on any undergraduate financial aid application. Some families therefore opt to use grandparent 529 savings to pay for college costs during the second semester of the student's sophomore year, or during junior or senior year.

Other Ways to Help

Once they understand how grandparent 529 plans factor into the financial aid process, grandparents usually feel better knowing the money they saved can provide the help they had intended to give to the grandchild. Here are a few other things I discuss with grandparents so they can maximize their support of the college process:

• Grandparents' college savings (and the family's financial situation) do not affect the student's ability to receive merit-based aid. Grandparents can support their grandchildren by encouraging them to study hard and challenge themselves academically. This could possibly put them in a position to receive merit-based aid at some schools.
• Families who understand the need-based financial aid process can plan better how the assistance from grandparents can fit in to the overall college financing plan. MEFA's resources can help families learn about financial aid.

Knowing that he or she has a college savings account can be an inspiration for a student to work hard in school! Parents and grandparents should talk to students about any 529 plans in place to help them pay for college.

Additional information specific to grandparents saving for college can be found here. And if you or another family member would like to speak to someone about your financing plans for college, call us at (800) 449-MEFA (6332).

Please note that due to the Consolidated Appropriations Act, 2021 grandparent support will no longer be collected in the student untaxed income section on the FAFSA, likely beginning with the 2024-25 FAFSA. You can read about this and other planned FAFSA changes in our blog post here.