FAFSA Changes Benefit Grandparent 529s

FAFSA stands for the Free Application for Federal Student Aid. It is the main form used by universities and colleges that determines a student’s eligibility to receive financial aid. To simplify, there is a formula that assesses the income and assets of both parents and students. This formula is used to calculate a families Expected Family Contribution or EFC.

For example, if a parent owns a 529 for their child, assets in the 529 will reduce a student’s financial aid eligibility by approximately 5.64%. Sometimes, a grandparent owns a 529 for their grandchild. However, grandparent-owned 529s use a different calculation approach than parent owned 529s.

While the grandparent is not included on the FAFSFA form, any withdrawals from the grandparent-owned 529 used to pay for college expenses must be listed as untaxed income to the student. In the FAFSA calculation, student income is assessed at around 50%. In other words, if a grandparent uses $10,000 from their 529 for their grandchild Sally to pay for college expense, that has the impact of reducing Sally’s financial aid eligibility by about $5,000. Ouch!

But here is the good news. Upcoming calculation changes to the FAFSA mean students will no longer be required to report any cash support they receive – including from grandparent owned 529s. In other words, grandparent owned 529s will not be counted at all and will not reduce a student’s financial aid eligibility. These changes do not apply until the new FAFSA form is released on October 1, 2022.

It should also be noted that a few mostly elite private colleges use an additional form to assess a student’s financial aid eligibility – known as the CSS Profile. As of this writing, we do not know if the FAFSA changes will have any impact on the CSS Profile.