President Barack Obama signed an executive order altering the regulations a couple of months ago. As a result, the above strategy must be upgraded.
Why the modifications? Primarily to make the procedure of filling in the Free Application for Federal Student Aid (FAFSA) easier and quicker. Starting with the 2017-2018 school year, the declared earnings for the student and his/her parents will be based on records from 2 years preceding (2015) rather than the previous year (2016). This resolves an issue applicants experienced every January trying to figure out their previous year's earnings when they had not yet finished their previous year's taxes.
Still better, applicants will now have the ability to use the IRS' automatic Data Retrieval Tool to fill the FAFSA, making the procedure quicker and less error-prone.
Lastly, the first application procedure is shifted back to October of the preceding year (a full 11 months before the student will matriculate), providing students more time to think about expenses as they evaluate schools to which to apply.
Effect of guideline change
So what's the impact of this policy change? Basically, it gets rid of the third year of college costs from the FAFSA calculation. In other words, it makes no difference how you pay for the student's junior year since income and assets in that year will have no impact on his or her senior year.
As a result, the new financial aid maximization strategy should be to separate your cost savings equally (50 percent each) between the parents' 529 plan and the grandparents' 529 plan. The parents' 529 plan should be used for the first 2 years of college and the grandparents' plan for the last 2. If your kid takes five years (or more) to finish school, it's often the last two that should be funded by the grandparents' 529 plan.
One fascinating side effect of the modification is that your 2015 earnings will be utilized for the 2016-2017 school year, as well as for the 2017-2018 school year. If your (and/or your kid's) earnings was unusually low during that year, it will count double towards maximizing his/her aid prospects.
As I have written before, there many other tax-efficient methods you can implement for college savings beyond saving through a 529 plan, so be sure to invest time discovering them well before your child comes close to college age. And always bear in mind that it's important to have a contingency plan simply in case he/she chooses not to go to college.