Will this 529 plan hurt chances for financial aid?

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Q. I am the grandparent of a 15-year-old. I have established a 529 plan for her under my custody. I understand that any withdrawal for her college expenses during her first year-and-a-half will weigh heavily against possible financial aid. Can I pay those expenses from a separate personal account and avoid that possibility, and use the 529 funds for her last two years with no aid reduction? Or should I just transfer control now to the student’s mother?
— Grandma

A. It’s great that you’re aware of how schools will look at 529 funds. Many people don’t realize it until it’s too late to plan.

You’re correct that this can impact your grandchild’s financial aid, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton.

He said you have several options.

As you suggested, you could use the 529 funds for the third and fourth year in college.

Or, if you trust your daughter’s mom, you can transfer the funds as you suggested.

“If you do this, do this now so the money is in the child’s mom’s account for as long as possible,” Lynch said. “You want to avoid it looking like a transaction where you do it just to avoid adverse issues in financial aid.”

Another possibility, if your grandchild needs money before the third and fourth years, you could have her take a loan that you could pay off upon graduation.

“I like this as the kids now have skin in the game,” Lynch said. “You can tell them, ‘Iif you get a 3.0 or better, you will pay off the loan.”

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This story was originally published on Oct. 12, 2020.

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