Terry,

My daughter has a 529 pre paid plan that will pay for 120 credit hours. Her grandmother is the owner. The plan provider, College Illinois, told me that since her grandmother is the owner the income when paid out will not count against her. FAFSA tells me that it will. Can you help me? Do I get the ownership changed to us the parents? Is a pre paid 529 different than a regular 529?

Terry Says:  The plan provide — CollegeIllinois — is WRONG.   (And that’s not surprising to me, because they have not demonstrated themselves to be a very professional or reliable organization!)

According to Edvisors.com, a great site for information about college savings and financial aid, only assets in the student’s name, the parent’s name (if the student is a dependent student) or the name of the student’s spouse (if the student is married) are reported on the FAFSA. Assets held by others, such as a grandparent, aunt, uncle, cousin or sibling, are not reported on the FAFSA but may be reported on the PROFILE.  Here’s a link to that page on the Edvisors site.  ( If you’re wondering about that word “PROFILE”, it is the CSS Financial Aid Profile, which may be required by some schools.)

HOWEVER,  the year that money is taken OUT of the plan, it becomes an asset of the student — weighing much more heavily against the student in the financial aid formula!   Here’s another quote from that same article, which I linked above:

“Income and distributions from a non-reportable asset are reported as taxable or untaxed income on the FAFSA and PROFILE. For example, grandparent-owned 529 plans are not reported as an asset on the FAFSA, but any distributions from a grandparent-owned 529 plan will be reported as untaxed income to the beneficiary (the student) on the subsequent year’s FAFSA. This can have a severe impact on eligibility for need-based aid, as student taxable and untaxable income can reduce aid by up to half of the amount of the distribution. Workarounds include waiting until the child’s senior year in college to take a distribution (assuming that the child will not be enrolling in graduate or professional school) and changing the account owner to the student or the student’s parents. (Distributions from a college savings plan owned by the student or parent are ignored on the FAFSA. Such college savings plans are reported as parent assets on the FAFSA, but the reduction in aid eligibility is minimal.)”

And I just double-checked with Mark Kantrowitz, author of that article, and he says that same rule applies to both pre-paid tuition 529 plans and the investment 529 plans.  Here’s a quote from his email to me:

“Yes, 529 college savings plans, prepaid tuition plans and Coverdell education savings accounts are all treated the same.   Also, there’s a general principal that if a savings account is not reported as an asset on the FAFSA, distributions must be reported as income to the beneficiary. For example, a tax-free return of contributions from a Roth IRA is reported as untaxed income on the FAFSA. “
 

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