Grandparents will find it easier to contribute to their grandchildrens’ college educations starting this fall. That’s when changes go into effect on the Free Application for Federal Student Aid (FAFSA) form that college students must fill out to receive financial aid from federal and state governments and colleges.
In the past, many grandparents have been reluctant to start a tax-advantaged 529 college savings plan for a grandchild because distributions from the plan could seriously reduce the amount of financial aid that the grandchild could get.
What’s new: Starting October 1, 2023, the FAFSA for the 2024–2025 academic year will not require distributions from a grandparent-owned 529 (or one owned by any other family member or friend) to be reported at all.
What to consider: You are allowed to “front-load” a 529 plan you own, contributing five years’ worth of annual gifts of up to $17,000 this year, for a total of up to $85,000 per person per beneficiary—or up to $34,000 per couple per beneficiary for a total of $170,000 this year—without paying a gift tax or chipping away at your lifetime gift-tax exemption. There is no limit or penalty on the amount of annual distributions you can take as long as they are used to pay for qualified education expenses.
Caution: Some colleges use a secondary financial aid report called the CSS Profile, which still may ask about outside contributions and consider those as student income. Two workarounds: Wait until after January 1 of your grandchild’s sophomore year of college to take a distribution from your 529. At that point, it no longer affects aid eligibility, assuming that the student graduates in four years. Or wait until your grandchild has graduated to take a distribution, which can be used to pay back any student loan debt that has accrued, up to $10,000.
