Grandparent 529
I understand there are rule changes from the Consolidated Appropriations Act of 2021 concerning FAFSA. Am I correct that there is no longer a penalty (for lack of a better term) for a grandparent being the custodian of a 529 as opposed to the parent being the custodian? I understand that the beneficiary will no longer have to disclose any amount received from the grandparent 529 or other cash support. Thank you for clarifying.
Terry Says
Good point. Under current law, money distributed from a grandparent custodian’s 529 plan is considered an “asset” of the child, weighing far more heavily against the family in the FAFSA formula.
BUT there is a change pending:
Because of pending changes to the Free Application for Federal Student Aid (FAFSA), students will no longer have to disclose cash support. That means effective for the 2024-2025 school year, grandparent-owned 529 accounts will no longer impact a student’s eligibility to receive needs-based financial aid.
It’s not clear to me that this FAFSA rule has been finalized yet, so grandparents should be aware of the current laws, which still have a heavier impact on financial aid. A new FAFSA form will not be released on October 1, 2022, as originally planned. Therefore, until income reporting changes take effect, grandparent 529 plan distributions may count as untaxed income on a student’s FAFSA.
