Grandparents often want to help with their grandchildren’s college tuition bills. But you should be very careful about using a 529 plan for these expenses.
The reason? College financial aid programs generally don’t consider parents’ contributions from a 529 plan as student income, but they typically do consider grandparent 529 contributions as income. As a result, these contributions could reduce a student’s eligibility for grants, subsidized loans, and work-study programs.
Only 11% of grandparents are aware of this problem, according to a recent study by Fidelity.
If a student expects to be eligible for financial aid, in many cases it might be preferable for grandparents simply to give money directly to the parents in order to help out – even though this means forfeiting the tax-sheltered advantages of a 529 plan. Grandparents can also contribute to the parents’ own 529 plan, although not all states allow a tax benefit for doing so.
If you’re a grandparent and you already have a 529 plan, you can try to transfer ownership of it to the parents. However, some plans don’t allow such transfers, and some treat them as a distribution, which means incurring taxes and penalties.
You can also wait and make one large contribution in the student’s senior year, since the student will no longer have to fill out financial aid forms in the future. However, some schools consider grandparent 529 plans when calculating financial aid packages even if no contributions are made from them, so this strategy won’t work if the student goes to such a school.