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The 529 Plan Grandparent Loophole

Jul 31, 2012

You have been saving for college in a 529 plan for many years now but still the amount of money is not enough to pay everything. So you apply for financial aid using the FASFA form. On the FASFA form you must report the assets of the parents and the child when determining Expected Family Contribution (EFC).

The EFC is how much money your family is expected to contribute to your college education for one year. Typically, the lower your EFC, the more financial aid you will receive.

Many people think that not putting the 529 Plan money in the parents or child's name will help them get more money. This is wrong. If a grandparent or non-custodial divorced parent owns the 529 account, you don't have to report it as an asset on the FAFSA at all. You may be tempted to exploit this loophole, but there's another consideration, according to Hurley of You'll have to report each 529 distribution as student income instead, and the federal government counts 20 percent of that as an EFC.
That's much worse than the 5.64 percent that's counted if the parent or dependent student owns the account and you report it on the FAFSA.

Another reason for having the 529 account in the parents name is if the grandparents is it keeps it from being taken to pay long term care expenses if the grandparents ever have to enter a nursing home. As an asset of the grandparents the asset is part of the estate an you may run into problems later.

The bottom line is the grandparents can still set up these plans but ultimately the best ones to have ownership of the account is the parents.

Got further questions? Catch me on twitter and DM me @529SavingsPlans or e-mail me at 529CollegePlans at Want to be heard? Leave a reader comment below.

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