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529 FAFSA Changes – More Reasons to Spoil the Grandkids!


With most schools just letting out for Summer, it’s unlikely that college savings is currently top of mind.   Instead, you may be focused on Summer Camps and family vacations.  Grandparents in particular may be making plans to spend a little extra time with their grandkids – wanting to spoil them as much as they can before they grow up.

We often hear from clients that they want to contribute to their grandchildren’s future education cost, but they they’re fearful it will count against them for Financial Aid purposes.   In their defense it has been a tricky system to navigate until recently.

Fortunately, changes have been enacted to combat this.  As student loan figures balloon, the government & IRS realized the last thing they should be doing is implementing rules that might deter someone from saving.

For the sake of understanding the changes, let’s quickly review the FAFSA (Free Application for Federal Student Aid) application and what it looks like when a student applies for Federal Financial Aid.  

In the simplest terms, there are 4 criteria reviewed:  Student Assets, Student Income, Parental Assets & Parental Income.  Each is weighted differently to determine what a students’ “need” is relative to the cost.

As you can see, Grandparent-held assets are NOT one of the 4 pillars that needs to be disclosed – so where was the catch?  Where things got messy was once a grandparent had provided financial assistance - whether through a 529 distribution or otherwise - the student was expected to claim that in the following year as Income.  

Student Income is weighted at a lofty 50% (for income over $6,840)* which could have a meaningful impact on if they would qualify for assistance in the following year.  In dollars and cents: A 10k gift from a grandparent could translate to as much as a 5k reduction in need.

With the new changes in place, effective the 2023 academic year students will no longer need to disclose “cash support”.  Instead, student income will be generated from tax return data alleviating the fear or concern from grandparents that they’re negatively impacting financial aid eligibility.

It is also worth mentioning that a 529 held in the parent’s name is considered a Parental Asset and not an asset of the Student.  Parental assets are the lowest factor in the equation at 5.64%.  The same 10k held in a parent’s 529 is only a $564 reduction to the students need.

If the change to the FAFSA isn’t enough to excite you, you should be reminded of all the additional tax benefits associated with 529s:  

  • A gift to a 529 is considered a completed gift for tax purposes and out of your estate – yet, still fully liquid and in your control.  
  • Most states’ 529s off an in-state deduction for contributions made into a 529.  OH offers up to 4k/year per beneficiary and there is an unlimited carryforward on this deduction.  You’ll want to consult with your financial professional or CPA to understand the rules for your state.  
  • Assets grow tax free and distributions are also tax free if used for qualified 529 expenses.   
  • There are no time, age or income limits (unlike an IRA).
  • Finally, there are unique gifting limits available in a 529.  You can elect to gift up to 5yrs at once without claiming from your lifetime exclusion.  A couple, married filing jointly, can gift 75k each (15k/yr for 5 years) or 150k total without triggering any gift tax.

 Overall, saving in a 529 is one of the most powerful investments in terms of tax-deferral and deductions/credits for any parent or grandparent to take advantage of.  

Please reach out to us if you have any questions.


  • Source: https://www.columbiathreadneedleus.com/blog/fafsa-update-why-grandparents-now-have-greater-incentive-to-own-529-accounts?CID=2021CTI_Email_EducationSavings_529_CrossFirm_T4BL&BU_ID=0377566c5a311fc92e260be549ca04baed49b588240c146ac45018b16faf4124

LPL Financial. and its representatives do not provide legal or tax advice. We encourage you to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.

If withdrawals are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. Section 529 plans are established by various states and offered to residents of all states. Depending on the laws of the customer’s home state, favorable tax treatment may be limited to investments made in a Section 529 plan offered by the customer’s home state.

Courtney Walls is a registered representative of LPL Financial and investment advisory services offered through LPL Financial, a broker-dealer (member SIPC)  and registered investment advisor. Insurance offered through LPL affiliates and other fine companies.  CRN-3252500-061521