27 Dec How will this 529 plan impact the FAFSA?

Q. I am a grandparent and have a 529 plan in my name but have my granddaughter as the beneficiary. She will graduate high school in May of 2020 but is currently looking into FASFA. How will the 529 plan affect whatever financial aid she may apply for? I would like to be better educated on the process.
— Grandpa

A. It is great to hear that you have been setting aside funds for your granddaughter’s education.

The money inside the 529 plan will not affect your granddaughter’s application for financial aid, said Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany.

“Since the plan is in your name, it is you who has the rights to the assets,” Green said. “Because you are the account owner, you choose which investment options to use and also decide when and for what purpose to withdraw funds.”

In general, on the FAFSA form, a 529 plan owned by the custodial parent(s) typically counts as an investment and it may reduce need-based aid by a maximum of 5.64% of the asset’s value, Green said. However, withdrawals from 529 plans used for qualified higher education expenses owned by the custodial parent are not typically reported as parent or student income.

In your case, the 529 in your name is not counted as an asset on the FAFSA form, but withdrawals from the 529 plan are counted as student non-taxable income and up to 50% of the value of the withdrawal could impact financial aid, Green said.

Fortunately, he said, the FAFSA form has recently begun asking for income that goes back three years.

“For example, the 2020 FAFSA form asks for 2017 tax returns,” Green said. “This delay in student’s reporting income may open the door to make withdrawals as early as the child’s sophomore year since there is a gap between the time the withdrawals are taken and the time the student has to report the income on the FAFSA form.”

Green said another alternative is to transfer ownership to the parent or child because they both receive more favorable treatment for the 529 plan.

529 plans owned by dependent students are not counted as student assets but as parental assets, which is good because only 20% of student assets go into the formula to determine the final amount of aid, Green said.

In addition, withdrawals are typically not counted on the FAFSA form as they are when the 529 is in a relative’s name, he said.

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This story was originally published on Dec. 27, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.