David Lerner Associates: Grandparents and College: Be Careful not to Jeopardize Financial Aid

In February, the American Association of Retired Persons (AARP) and TIAA-CREF, a financial services company, joined together to provide information about Section 529 college savings plans to all AARP members. “Getting the entire family involved — parents, grandparents and children — reinforces the importance of setting and achieving savings goals,” said TIAA-CREF CEO Roger Ferguson Jr.

What Are Section 529 Plans?

Operated by states or educational institutions, 529 plans come in two forms: prepaid tuition plans and college savings plans. They allow tax-deferred growth and tax-free distributions if the funds are used for qualified higher education expenses. Unlike custodial accounts, another popular college savings tool, the owner of a 529 account maintains control over how the funds are used.

There is one potential drawback to grandparents contributing to 529 plans that you should be aware of, though. If the account isn’t set up properly, the grandparent’s contributions could end up jeopardizing the grandchild’s ability to receive financial aid. This is because 529 plan withdrawals that are made in a grandparent’s name must be disclosed as income to the student.

This could have a significant negative impact on the student’s financial aid package, as eligibility for financial aid is reduced by up to 50 percent for every dollar of student income.

Possible Solutions

There are at least two possible solutions that may enable grandparents to contribute to a 529 plan without jeopardizing their grandchildren’s potential financial aid. The first is for grandparents to give their money to the student’s parents to deposit in their 529 plan accounts for their child. In this scenario, the assets would not be considered income to the grandchild.

The other possible solution is to hold off on using the grandparent’s 529 contributions until after the student’s final financial aid eligibility has been determined. For example, the grandparent’s contributions could be kept in the account during the first three years of college and then used to pay the student’s expenses during his or her senior year.

Note that there is some good news when it comes to grandparents contributing to 529 plans for their grandchildren: Their assets are not counted in the determination of financial aid eligibility. The student’s own assets and those owned by his or her parents are included in the calculations, and schools expect a certain percentage of those assets to be used toward tuition, fees and other college-related expenses.

The rules regarding financial aid calculations and 529 plan contributions can get very complicated. Therefore, it might be wise to talk to a financial aid consultant about your particular situation.

529 Plans are offered by prospectus only. Investors should request a prospectus from the issuer or sponsor before investing. Read the prospectus carefully and consider the investment objectives, risks, charges, expenses and other information before investing.

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC.