Recent changes made to the 2024-2025 Free Application for Federal Student Aid (FAFSA) will make it easier for grandparents to help pay for their grandchildren’s higher education expenses without reducing future financial aid awards.
The 2024-2025 academic year FAFSA application was simplified through the Consolidated Appropriations Act of 2021. Delays caused the changes to not be implemented until the 2024-2025 academic year. The total number of questions on the entire application is reduced by almost two-thirds. Some of the important questions that were removed from the FAFSA application involve cash support and money paid on a student’s behalf from anybody besides their parents.
Cash support and money paid on a student’s behalf from non-parents were considered untaxed income for the student before the FAFSA changes. Untaxed income for a student used to result in a reduction in financial aid awarded by up to one-half of the amount of the student’s reported untaxed income. The questions about these gifts and payments will no longer be on the student’s FAFSA. Examples of this include grandparents gifting a student cash or paying for college expenses from a grandparent-owned 529 plan.
Parent-owned 529 plans are counted as assets on the FAFSA application, while grandparent-owned 529 plans are not counted on the FAFSA. The changes to questions about assets mean the grandparent-owned 529 plans are not included on the FAFSA application. As a result, distributions from these accounts will no longer be included as untaxed income for the student.
This opens an opportunity for families to utilize grandparent-owned 529 plans for higher education expenses throughout the student’s college career with no impact on future financial aid awards. This is called the “Grandparent Loophole” according to www.savingforcollege.com. Grandparent-owned 529 plans should be something families consider utilizing as the foundation of college savings strategies into the future.
Grandparent-owned 529 plan accounts can now be used during any year of the student’s higher education without lowering future financial aid awards. Grandparents may be eligible for several tax benefits from 529 plan contributions including tax-free growth inside the 529 plan, tax-free withdrawals from the 529 plan for higher education expenses, and some states allow state income tax deductions for 529 account contributions. Contributions to a 529 plan for a grandchild are considered a completed gift for federal gift tax purposes, which could reduce future estate tax liability.
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
