Limit the Impact of Grandparent-Owned 529 Plans on Financial Aid

My mother has a 529 for my daughter, who will be going to college soon. Will her 529 affect my daughter’s chances for financial aid?

A grandparent-owned 529 college-savings plan is not reported as either a parent’s or a student’s asset on the Free Application for Federal Student Aid (FAFSA). But distributions from the 529 must be reported as student income on the next year’s FAFSA, and students are expected to contribute 50 cents of every dollar of income toward the college bills (after an allowance of about $6,000.)

To minimize the impact, you could wait to withdraw money from the grandparent-owned 529 until the last financial aid form has been filed, after January 1 of your daughter’s junior year of college. Or find out whether you can switch the owner to a parent. Assets in parent-owned 529s are tapped at up to 5.6%, after an allowance, but withdrawals are not reported as income. Some 529 administrators, including TIAA-CREF, let you switch account owners by filling out a form. Others, such as Fidelity, don’t permit such transfers. If yours doesn’t, you can transfer the money to a 529 that lets you switch the owner from the grandparents to the parents. See SavingforCollege.com for more information about each state’s rules.

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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.