FAFSA Guideline Change Aids Grandparents in Funding Kid’s Education
Many grandparents enjoy the chance to help their grandchildren cover the rising cost of education. One way to do this is to open or contribute to a 529 college savings plan. These plans help pay for college while also carrying estate planning benefits for some grandparents.
In the past, 529 plans had a serious drawback for some children. When deciding whether a child was eligible for student aid, a 529 plan could hurt kids and their parents. The rules for these applications have been amended, making 529 plans an even more attractive option.
What Does a 529 Plan Do?
The cost of going to college has risen consistently for three decades. According to Forbes, the average tuition at four-year public colleges is nearly $11,000 and the tuition at four-year private nonprofit colleges is around $38,000. In 1992, those numbers were $4,160 and $19,360. That sharp increase has forced many students into debt. For 2022-2023, undergraduate tuition will be almost $57,000 per year at Stanford University and almost $53,000 at Santa Clara University.
Saving in advance can help students avoid the student debt trap. The 529 college savings plans are a key tool in helping students cover education expenses. The plans, sometimes referred to as qualified tuition programs, refer to the section of the Internal Revenue Code that discusses them.
Despite the name, the programs are actually run by state governments. The various states have different requirements for these plans, but in general, they have the same effect. The plans help people save for education, allow for tax-free withdrawals to cover those expenses and allow for flexible contributions.
Can Grandparents Start and Own a 529 Savings Plan?
The short answer is yes. If children already have a 529 plan set up by their parents, grandparents can simply contribute to that plan. Grandparents can also open a 529 plan of their own for their grandchild.
Under the old rules, grandparents were discouraged from opening their own 529 plans. The reason is that any money taken out by the student had to be reported as untaxed income on their FAFSA form. That income could result in a reduction of the financial aid the student was eligible to receive.
Plans owned by parents were treated differently. Instead of a maximum reduction of 5.64% of the value of the asset, grandparent-owned plans could see a maximum reduction of 50% of the value of the asset.
Impact of the FAFSA Changes on Grandparents
The FAFSA Simplification Act is scheduled to begin in the 2024-2025 school year. Going forward, FAFSA forms will not ask students to report cash support from 529 plans. The plan you start for your grandchild will not hurt them when it comes to seeking financial aid.
The Upside of 529 Plans
The 529 savings plans are highly useful for covering educational expenses. For students, they can be used to pay for:
- Tuition
- Books
- Fees
- School supplies
- Computers
- Software
- Internet services
- Rent, utilities, and food for students who live off-campus
Even though they are commonly known as college savings plans, the plans can be used for primary or secondary school tuition as well.
For grandparents, 529 plans are useful tools. They are beneficial estate planning tools with the following features:
- Flexible beneficiary and ownership structure: If the first beneficiary chooses not to pursue further education, a different beneficiary can be chosen. The owner of the 529 plan can also be changed.
- Investment tax benefits: investment earnings of 529 plans are not taxed as long as they are used for educational purposes. Withdrawals used for that purpose are also tax-free.
- Emergency use: Money in a 529 plan can be used to pay for non-education expenses. There are two drawbacks. First, any investment gain is taxed when the funds are used this way. Second, any money withdrawn for non-education purposes incurs a 10% penalty.
- Estate tax benefits: When you contribute to a 529 savings plan, the contribution amount is treated as a completed gift and removed from your taxable estate.
- Federal gift tax benefits: The 529 plans allow you to spread out a large contribution over a period of time (up to 5 years). This can allow you to make a gift that would otherwise trigger federal gift and generation-skipping transfer tax liability. This strategy is sometimes called “superfunding” a 529 plan.
- State law benefits: The 529 plans are overseen by state governments. You can choose any state when creating a plan. Some states may have more favorable rules for your situation. Neither your home state nor the location of the school your grandchild attends matters when creating a 529 plan.
Get Answers to Your Estate Planning Questions
The process of creating a 529 plan can be complicated. Making the right choices to fit in with your other estate planning goals is vital. Reach out to the Law Office of Janet L. Brewer to learn more about your rights and options when it comes to 529 savings plans and other estate planning tools. Call 650-325-8276 or send us a message today.
