Grandparents can donate more to College 529 plans after rule change

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(Bloomberg) — Grandparents who want to help pay for their grandchildren’s school fees get more for their money.

Recent changes to financial aid rules mean they will soon be able to contribute to 529 college savings plans they own without penalizing their grandchildren’s eligibility for federal money, a limitation that has made some grandparents think twice about opening new accounts or adding to existing ones.

“The fear that a grandparent helping their grandchild using their own 529 plan would interfere with them getting financial help, that worry has now disappeared with the new rules,” said Stuart Siegel, president of the service. college financial aid. FAFSA support.

The change is part of an overhaul of the Free Application for Federal Student Aid, or FAFSA, that students and their families complete when applying for financial aid. Its length and complexity have been blame to deter people from even asking for help, prompting Congress to streamline the process across the FAFSA Simplification Act.

Currently, money distributed to students from 529 accounts owned by grandparents effectively reduces the recipient’s eligibility for federal financial aid by 50% of the amount withdrawn for the student. This is because the current FAFSA asks students to report how much they receive from non-parental sources and then adds half of that gift to what’s called the Expected Family Contribution. This amount is then deducted from a student’s overall federal aid eligibility.

Simplified form

That changes under the new rules, which come into effect in the 2024-25 school year. Among the questions removed from the simplified FAFSA is one on outside contributions. Grandparents, as well as godparents, aunts, uncles, and other non-parental family members, will be able to contribute as much as they wish to their own 529 accounts without the student having to report funds later withdrawn.

State-run 529 plans are a popular way to pay for college because of their tax advantages: Participants don’t have to pay taxes on earnings or withdrawals as long as the money is used for university or some other education expenses. They can also be used to defray the costs of K-12 or, since 2019student loan repayments.

The total value of 529 plans hit a record $480 billion in the fourth quarter of 2021, up from $165 billion a decade ago, the Federal Reserve says Data. Some 37% of families with kids in college used 529 plans in 2020, with the average account holding $25,664.

Parents are the main contributors to 529 diets, but grandparents are often the second. In North Carolina, 16% of state-supervised accounts Plan CN 529 belong to the grandparents.

‘Big deal’

“It’s a big deal,” said Laura Morgan, vice president of the College Foundation of North Carolina, a nonprofit that administers the state’s 529 plan accounts. “The rising cost of education has made paying for college a family effort, opening the door for more grandparents and other non-parents to own and manage 529 accounts.”

While many wealthy families don’t apply or qualify for financial aid, the simplified FAFSA could be a boon for low- and middle-income students. The current form is so dense with questions about assets and income that many families don’t even bother to fill it out. More than $3.7 billion in free money was left on the table last year by families eligible for aid, according to a recent study.

Richard Thigpen, who has two grandchildren in sixth grade, is already preparing to help with their college. He saved about $10,000 for each in a 529 plan and looks forward to the change involving outside contributions taking effect.

“It was great,” he said. “It’s something meaningful that we can do.”

To contact the author of this story:
Scott Carpenter in New York at [email protected]

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