529s and FAFSA
I heard a rumor that the IRS recently made a ruling that if a grandchild’s FOB 529 is held by a parent, it counts against income for FAFSA. But if a grandparent holds the FOB 529, it does not count in a FAFSA income calculation. True or false? (And thanks for all the expertise you provide.)
Terry Says
It’s not a rumor — but you have it a bit mixed up. It USED to be that distributions from a grandparent owned 529 account weighed far more heavily in the financial aid formula — because those distributions were counted as a STUDENT asset, which weighs far more heavily in the aid formula for the subsequent year.
But NEW rules, effective for the 2023-2024 school year, will no longer count distributions from grandparent-owned 529 college savings plans as untaxed student income, and they will not have a detrimental impact on aid eligibility.
So you can keep building funds in a grandparent-owned 529 account without worrying that the future distributions will impact financial aid.
