Contributed by: Josh Bitel, CFP®
2021 has brought some significant changes to the Free Application for Federal Student Aid (FAFSA) process. Thanks to the Consolidated Appropriations Act of 2021, one of these major changes, which will be in effect for the 2023‐2024 academic year, will allow grandparents to help pay for college expenses without falling into a financial‐aid trap.
Before this Act, if grandparents owned 529 Account to help out with college costs, these funds would be considered income to the student in regards to the FAFSA process. The more income a student shows, the less aid this federal program is willing to offer that student. For this reason, grandparent‐owned accounts have been deemed “financial‐aid traps” by many industry professionals.
However, the new FAFSA questionnaire, which will come into play for the 2023‐2024 academic year, no longer asks students to disclose cash support on the form. The IRS now uses a data retrieval tool for this purpose, therefore all student income will be taken from tax return data. This opens up a significant opportunity for grandparents to help cover some educational expenses for their grandchildren without impacting their financial aid status.
529 accounts remain the most popular and tax‐efficient way to help pay for education expenses. Any contributions to these accounts are removed from the contributor’s taxable estate, the funds within the account are invested and grow tax‐free, and (if used for educational expenses) withdrawals are taken out free of tax too! Grandparents have always been able to establish and contribute to these plans, however up until now, there were major pitfalls to be aware of. With the Consolidated Appropriations Act now in full swing, grandparents should strongly consider 529 accounts as a tool to help with education costs.
Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.
Disclosure: As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover education costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. favorable state tax treatment for investing in Section 529 college savings plans may be limited to investments made in plans offered by your home state. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan.