FAFSA Rule Changes for Supporting Your Grandchild’s College Path

FAFSA Rule Changes for GrandparentsFAFSA Rule Changes for Grandparents

Are you eager to contribute to your grandchild’s future college education? FAFSA Rule Changes for Grandparents have made it easier than ever before. The recent FAFSA Simplification Act empowers grandparents to support their grandchild’s education more effectively.

Previously, contributions or distributions from a grandparent’s 529 college savings plan could impact the student beneficiary’s eligibility for federal financial aid, as they were subject to FAFSA reporting. However, these new changes are a breath of fresh air, offering a more favorable scenario.

In this blog post, we will explore the alterations brought about by the new rules and how grandparents can utilize them to support their grandchild’s educational journey.

Demystifying the 529 Account

Let’s begin by clarifying what a 529 college savings account is. It’s a specialized savings account that assists individuals, including grandparents, in setting aside funds for future college expenses. Contributions aren’t federally tax-deductible, but earnings grow tax-free within the account. When these funds are withdrawn to cover qualified education expenses, they remain untaxed.

Understanding the Impact of the New Rule Changes

Previously, if a dependent student or custodial parent owned the account, they reported the 529 plan’s total value as an investment asset on the FAFSA. If a grandparent owned the 529 plan, it treated any distributions as untaxed income for the student, potentially affecting financial aid eligibility adversely. The upcoming changes eliminate this concern.

In a nutshell, a 529 plan owned by a grandparent will no longer require reporting on the FAFSA. Even more significant is that distributions from this grandparent-owned 529 plan will not be considered untaxed income for the student. This opens up opportunities for grandparents to contribute to their grandchild’s education without jeopardizing financial aid eligibility.

Strategies for Maximizing Grandparent Contributions

Here are some essential considerations when making contributions to a 529 account for your grandchild:

  1. Funds Must Be Used for Qualified Educational Expenses

    Grandparents can utilize 529 plan funds for various qualified educational expenses, including tuition, room and board, books, supplies, laptops, and internet access. However, it’s crucial to acknowledge that certain expenses like insurance, student health fees, transportation, and extracurricular activities are not covered. Using 529 plan funds for these may incur a ten percent penalty.

  2. The Annual Gift Exclusion

    While grandparents can contribute to their grandchild’s 529 plan, it’s essential to be aware of the federal annual gift exclusion. This represents the maximum amount of money a person can gift to someone else without being required to file a gift tax return. Currently, the limit stands at $18,000 for an individual and $36,000 for those filing jointly with a spouse. There is also a special rule that allows gift givers to spread larger one-time gifts across five years to remain within their lifetime gift exclusion.

  3. Reconsidering Payments Made Directly to The School

    Distributions made directly to the school from grandparent-owned 529 accounts will not impact aid eligibility. Nevertheless, it is currently recommended to make payments directly to the grandchild.

  4. Timing Is Crucial

    When withdrawing funds from the 529 plan, it’s essential to do so within the same tax year as the educational expenses. This approach ensures seamless financial transactions and adherence to tax regulations.

  5. Monitoring Withdrawal Limits

    The amount withdrawn from all 529 plans should not exceed the total cost of the qualified educational expenses billed by the school. Excessive withdrawals may incur a 10 percent penalty. However, there is a 60-day window to rectify the situation without penalties.

Supporting Your Family’s Future with Love

It’s an inspiring opportunity to contribute to a brighter future for the younger generation. Understanding the new FAFSA rule and using 529 plans can significantly aid your grandchild’s education without harming their financial aid. This transforms a 529 account into an even more valuable investment tool, one that not only assists your grandchild in affording their education but also leaves a legacy of love and wisdom.

At our firm, we believe estate planning goes beyond asset disposition after you pass.

We call it Life & Legacy Planning, making heartfelt decisions for peace, love, and guidance to your loved ones now and in the future.

What to do once you know

If you are ready to create a plan that takes care of everything you own and everyone you love in the most caring manner possible, reach out to us to learn how a Life & Legacy Planning Session can benefit you.

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This article is a service of the Law Office of Aisha M. Williams, APC, serving San Diego, Carlsbad, Escondido, and all of California. We don’t just draft documents. We ensure you make informed decisions about life and death for yourself and the people you love. That’s why we’ll start you with a  Family Wealth Planning Session, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love.

We created this material solely for educational and informational purposes. It does not serve as ERISA, tax, legal, or investment advice. Should you need legal advice tailored to your specific needs, you must seek such services independently.