The ‘grandparent loophole’ is putting much-needed money back in the pockets of college students — here's how it's helping younger Americans
Post-secondary education is an expensive proposition, so it’s not surprising that many older Americans want to help their grandchildren pay for some of it.
Fortunately, this has become a little easier thanks to the new “grandparent loop,” which is part of the recent changes made to the 2024-25 Free Application for Federal Student Aid (FAFSA).
Don't miss
Commercial real estate has beaten the stock market for 25 years — but only the super rich could buy in. Here's how even ordinary investors can become the landlord of Walmart, Whole Foods or Kroger
Cost-of-living in America is still out of control — use these 3 'real assets' to protect your wealth today, no matter what the US Fed does or says
These 5 magic money moves will boost you up America's net worth ladder in 2024 — and you can complete each step within minutes. Here's how
In 2023-24, the average annual cost of tuition and fees for a full-time undergraduate student enrolled in a four-year program ranged from $11,260 for a public in-state institution to $41,540 for a private non-profit institution, according to the College Board.
Although the increase in tuition from the previous year was less than the rate of inflation, these fees still increased by 2.5% and 4.0%, respectively.
But tuition isn’t the only expense. On average, housing and food expenses cost $12,770 annually for a four-year public in-state program and $14,650 for a private non-profit program, according to the College Board. Students also need to factor in the cost of books, software and hardware, which have all been impacted by the recent period of high inflation.
How the 529 savings account can help
A 529 savings account is designed to help families save for a child’s education. It’s a tax-advantaged account that’s typically opened by a parent (or grandparent), with the child designated as the beneficiary.
Contributions are considered gifts — the amount that’s exempt from the IRS gift tax is $18,000 per year for individuals and $36,000 for married couples.
Money grows tax-deferred in the account, with some states also offering tax deductions on contributions. If withdrawals are made for qualified education expenses (as defined by the IRS), they won’t be subject to state or federal taxes.
Qualified education expenses include tuition, mandatory fees, room and board, books and other school-related expenses. Withdrawals can be used for tuition at any U.S. college or university, as well as some international institutions.
But for many students, their savings aren’t enough to fund an education, so they still require some form of financial aid. In 2022-23, for example, the average aid per full-time equivalent undergraduate student was $15,480, according to the College Board.
In addition, the Education Data Initiative reported that the average federal student loan borrower has $37,088 outstanding.
Read more: Jeff Bezos and Oprah Winfrey invest in this asset to keep their wealth safe — you may want to do the same in 2024
The ‘grandparent loophole’
To apply for student aid — including grants, scholarships and loans — from more than 6,400 colleges and universities in the U.S., you’ll need to fill out a Free Application for Federal Student Aid (FAFSA).
The form, which collects demographic and income information, allows you to list up to 10 schools that you’d like to attend. If you’re successful in getting aid, you’ll hear back directly from these schools.
It’s here that the “grandparent loophole” now exists. Starting with the 2024-25 FAFSA, an applicant's total income will be calculated directly from the IRS Data Retrieval Tool (DRT), so it will only be based on their federal income tax return. This means that cash support, such as disbursements from a grandparent’s 529, won’t affect financial aid eligibility.
Previously, distributions from a grandparent-owned 529 plan had to be reported as untaxed student income, which could reduce financial aid eligibility by as much as 50% of the withdrawal amount.
Now, grandparents, or other family members and friends, can gift money to a student without hurting the student’s eligibility for financial aid.
Maximizing the benefits of the 529
To maximize the benefits of a 529, open it as early as possible so your investments have more time to grow. You also have the option to gift five years’ worth ($90,000 for an individual and $180,000 for a couple) in one lump sum and still avoid the gift tax.
It can pay to consult a financial advisor to help optimize the portfolio you build from your contributions. It may also be a good idea to move to a more conservative portfolio before you need to start taking withdrawals, which can help preserve the gains you’ve made and ensure the money will last.
However, make sure withdrawals from the plan are used only for qualified expenses — you’ll face heavy tax penalties if they’re spent on non-qualified expenses.
What to read next
Car insurance premiums in America are through the roof — and only getting worse. But 5 minutes could have you paying as little as $29/month
Jeff Bezos, Mark Zuckerberg, and Jamie Dimon are selling out of US stocks in a big way — here's how to diversify into private real estate within minutes
'It's not taxed at all': Warren Buffett shares the 'best investment' you can make when battling rising costs — take advantage today
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
