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Given the escalating cost of college schooling, an increasing number of grandparents are pitching in to pay for college fees for his or her grandchildren. Given their flexibility, 529 plans are the top choice for grandparents. However, they can complicate a child’s chances of qualifying for financial aid.
The problem arises when students receive money from the 529 plan. That will appear as income in the student’s name, which must be reported on the FAFSA, which reduces the amount of financial aid. Note that FAFSA, the financial aid form that most colleges require when a student applies, is also required to be updated every year he or she is in school.
#1 Postpone 529 proceeds until the junior year.
To avoid a potential reduction in aid, grandparents should put off sending 529 proceeds until the last two years of college. Distributions from grandparents’ 529 plans are seen as student income, and could reduce aid by 50 percent.
So postponing the distribution of funds to your grandkids until junior year is a brilliant idea.
#2 Give money directly to parents.
Another way is for grandparents to give money directly to the parents. The federal formula “assesses” 20 percent of a student’s assets, compared to only 5.64 percent of parental income and non-retirement assets. The more money that is in a child’s name, the more it pares back the aid package.
So grandparents should gift the money directly to the parents is another brilliant idea.