Labor Day weekend marks the start of another school year, with many parents and grandparents thinking about how best to fund education for kids that will soon be miraculously old enough for grade school, high school, college or grad school. Carla Wigen, the COO of LNWM and Monica Padineant, Director, Client Services explain in a recent paper how grandparents can fund education for the younger generations in the family, including paying for tuition directly, 529 Savings Plans, custodial accounts and trusts.
Depending on the situation, we also strategize with our clients about ways to fund education not just for family members but also for kids in their communities with the ability but not the funding to attend college. Many believe that education is an asset that keeps on giving and can do much to alleviate the socioeconomic equalities that exist, especially for kids from low-income families attending college for the first time.
529 Plans as Supplemental Funding
A major stumbling block for many students who are first in their families to attend college is the federal financial aid application called FAFSA (Free Application for Federal Student Aid). In the next several years, it is likely this hurdle will become easier to jump over, thanks to the FAFSA Simplification Act passed in 2021. Once the changes are phased in for the 2024-2025 academic year, FAFSA will have 67% fewer questions and no longer ask about certain types of outside funding. One key thing: students will not be asked to report withdrawals from a 529 Savings Plan started by a non-parent (grandparent, other relative, friend of the family, sponsor, etc.).
Currently, withdrawals from a non-parent 529 plan to pay for college are considered assets of the student and reduce financial aid eligibility by a whopping 50%. For example: A $10,000 distribution from a non-parent 529 could reduce student aid by $5,000. Not having to take this hit to financial aid will make it more worthwhile to use 529 Plans withdrawals as a supplement to financial aid. Also, because 529 Plans allow the owner to change the beneficiary at any time, different students can benefit depending on the need.
What about assets staying in the 529 (the money in the 529 that is not withdrawn to pay for college and considered income)? This is taken into account for families with $30,000 to $50,000 in assets, but it is capped at 5% to 6% of the net value of parental assets, which is how money in custodial accounts is treated by federal financial aid rules.
Keep in mind that some 300 private US colleges and universities require that students fill out the CSS Profile form for non-federal financial aid, in addition to the FAFSA. The upcoming changes to FAFSA do not apply to the CSS, which is likely to continue asking for withdrawal info from 529 Plans set up by non-parents.
Still, FAFSA simplification is a welcome change, although we are still two years out from implementation.