Thanks to the ever-rising cost of a college education and the stagnation of middle class incomes, fewer and fewer cash-strapped parents are able to shoulder the burden of college costs all by themselves. Often, that's where generous relatives come in.
Last month, the AARP teamed up with financial-services company TIAA-CREF to provide information about college savings plans, also known as 529 plans, to AARP members. As TIAA-CREF CEO Roger Ferguson Jr. said in a press release, when it comes to college savings, "getting the entire family involved -- parents, grandparents and children -- reinforces the importance of setting and achieving savings goals."
However, despite their best intentions, grandparents who answer the financial call can end up making it harder for their children and grandchildren. If a college savings plan isn't set up properly, those generous contributions can actually hurt the student's financial aid package.
On one hand, grandparents' assets are not counted at all when colleges determine eligibility for financial aid, and that includes money in 529 plans that they set up for their grandchildren. By contrast, the assets that students and their parents own are included, with schools expecting them to use certain percentages of those assets each year to pay tuition and other college expenses.
But before you try to use grandma and grandpa as a financial-aid shelter, be aware that when grandparents take money out of a 529 plan to spend on college expenses, students have to disclose the withdrawal as their own income.
That has a huge impact on financial aid: Current rules cut aid eligibility by as much as 50 cents for every dollar of student income.
2 Solutions for Grandparents
To avoid causing a big loss in financial aid, grandparents have a couple of options:
If grandparents give money to the student's parents to deposit in their 529 plan accounts for their child, the assets aren't treated as the student's income.
The other possibility is to wait to use grandparents' 529 plan money until after the student's final eligibility for financial aid has been determined. For instance, grandparents' 529 plan distributions used to pay for a student's senior year shouldn't affect eligibility, because the year in which the income will be reported (as income for the previous year) will also be the year in which the student graduates.
Financial aid rules can be complicated, but they're crucial in helping students make college affordable. Grandparents should make sure their attempts to help out their grandchildren don't end up being counterproductive.
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