Grandparents who wish to help pay for their grandchildren’s college tuition will soon be able to contribute to a 529 college savings plan without reducing their grandchildren’s eligibility for federal financial aid. Upcoming changes to financial aid rules will do away with current rules, which have prevented many grandparents from contributing to a 529 plan for fear of decreasing the amount of federal aid for which their grandchildren will be eligible. Read on for more information from your KerberRose Trusted Advisors about these changes.
What is a 529 Plan?
A 529 plan is a savings account designed to be used for the beneficiary's education expenses. Many people start 529 plans to pay for college due to their tax benefits. If the money contributed to a 529 is for college and a handful of other education expenses, participants do not have to pay taxes on withdrawals or gains from the plan. Money from 529 plans can also be used to pay K-12 expenses and student loans repayments.
In 2020, the average 529 account held $25,664. Parents are the largest contributors to 529 plans. Grandparents are typically the next largest contributors.
FAFSA Simplification Act
This change is part of a multitude of modifications being made to the FAFSA (Free Application for Federal Student Aid). All of the proposed modifications are contained within the FAFSA Simplification Act, which was passed by Congress in 2021 and will be effective starting July 1, 2023 for the 2023-2024 school year.
Many people have suggested the length and complexity of the FAFSA have prevented people from seeking federal financial aid. Congress intends to encourage more people to apply by simplifying the process with the FAFSA Simplification Act.
Current 529 Plan Rules
The current FAFSA requests students report the amount of money they receive from non-parent sources for education expenses. Half of the reported amount is then added to the Expected Family Contribution, which is deducted from a student’s federal financial aid eligibility.
At the moment, money received from a 529 account owned by a student’s grandparents reduces their federal financial aid by 50% of the amount distributed from the account.
Future 529 Plan Rules
The new FAFSA rules are slated to take effect during the 2023-2024 school year. Several questions will be removed from the simplified FAFSA, including the one about non-parent contributions. All non-parent family members will be able to contribute as much money as they want to a 529 plan without the student having to report any withdrawals.
With the rising costs of a college education, this update makes contributing to a 529 account more attractive than ever.
If you have any questions about how a 529 can benefit your family or if you would like to set one up, contact a KerberRose Trusted Advisor today.