529s for your Grandkids, are you Hurting More than Helping?
I recently was asked an interesting question by a client the other day in regards to funding college savings for his grandchildren. The question was “If I start a 529 for my grandkids, will I be hurting their chance to get financial aid in the future.” The answer, as with most financial question was, “that depends.” We discussed a few scenarios and were able to come up with the appropriate recommendation, but the range of recommendations ranges greatly which makes this topic so interesting.
In general, saving more for the future is a best practice, therefore as a default, putting money aside in a 529 for a future college expenses is a great idea. That being said, depending on whether you are saving for your own child or grandchild and their age at the time you start saving might affect their financial aid eligibility. FASFA looks at 529s differently depending on who owns the account. If you as the parent own the account FASFA will use 5.64% of the 529 account value in the Expected Family Contribution (EFC) calculation. So if you own $100,000 in a 529 for your daughter, that will add $5,640 to your EFC for the year. Same applies if the account is in your child’s name but they are a dependent. If the account is owned outright by your child that is not a dependent then the percentage goes up to 20% a year, or in the same scenario $20,000 to the EFC. If you own the 529 as a grandparent (or parent of an independent student) then none of the account value is counted to the EFC, instead, distributions from the 529 are counted as income to the student. Those rules are 50% of the distributions minus the annual income allowance ($6,420 for a dependent student in 2017-2018). So if you were to take $30,000 out of the 529 to pay for college tuition, in subsequent years, the students EFC would be increase by $23,580. Additionally now FASFA uses prior-prior year (PPY) for income calculations meaning that they look at your 2015 tax return for school in 2017. While those are the technical rules, here are some scenarios that might simplify what to do.
Grandparents saving for young children
While the rules above may affect the students financial aid eligibility, the benefit of tax-free compounding growth in a 529, should offset the potential loss of aid. Also, FASFA rules are subject to change, therefore a bird in the hand is worth more than two in the bush. Start saving early while you have time and compounding on your side. Additionally, if these 529’s are used in the later years of college or graduate school, even better. If it is an option, you may also consider contributing to a 529 in the parent’s name for the benefit of the child.
Grandparents saving for older children
If your grandchild is only a few years away from college, you may consider gifting to the parents. This can include a 529 that the parents own for the benefit of the child. This will only add 5.64% of the savings to their EFC on FASFA as opposed to 50% of distributions. A 529 in your name may still be advantageous especially if you use it for the latter years of college or graduate school. This avoids the FASFA income calculation and gives a longer investment time horizon. Also, paying college tuition directly in the latter years can be a beneficial strategy.
The reality that saving for college is has become a family affair. We recommend working with an advisor that can coordinate the savings strategy with your specific situation and goals. If you have grandparents and parents saving for a student’s college, that plan can become even more complex. The good news is I have yet to meet someone that complained about saving too much. So start their and then work with an advisor that can best strategize how to utilize those savings.
For more information about Grandparents and College Savings read http://www.finaid.org/parents/grandparents.phtml
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program.