529 question that the account is in grandparent name and financial aid

Chris 2018-04-17 11:31:27 UTC #1

My son is going to college in fall 2018 and we just found out that grandma has a 529 plan. I understand it won't affect his financial aid the first year but what about the next three years. He got a 1500.00 scholarship for four years which leaves about 10,500.00 out of pocket before his grant. But if I'm reading this right that he might not get that grant in the future years due to him having to claim that 10,500 we will withdraw to cover tutition as. actual income to him. He got a athletic scholarship from a private school for the same amount but the school is tuition is double the price. And the school is not well known. First is what I've been reading correct that when he goes to fill out the financial aid forms for his sophomore year does he have to claim what we withdraw for tuition as his own income or when he files in his junior year? Or do we move it out of grandmas name to ours when he goes to file is junior year. Help!!! We have to decide this week on what we want to do and we knew until we discovered this. And the college she got a athletic scholarship from needs an answer by tomorrow.

dcandmc 2018-04-17 12:55:40 UTC #2

Assuming your son completes his undergraduate degree in the normal four academic years, you can avoid the 529 distributions from grandma having any impact on need-based financial aid by waiting until second semester (spring) of sophomore year to use money from that 529 account. The financial aid forms are based on prior-prior year income, so 529 money from grandma that is used in January 2020 (beginning of sophomore spring) or later would not be reported on a financial aid application as untaxed income until academic year 2022-2023 at the earliest, which is the year after your son's projected senior year.

Chris 2018-04-17 13:55:42 UTC #3

Thank you-- so he will have a balance of out of pocket after grant and scholarship of 5,500.00 for freshman year and we should not draw on the 529 plan and pay that out of pocket. That way he will be able to get the same grant amount for his sophomore year when he applies for financial aid and we can then use the 529 to pay for whatever tuition bill is left. Then when he applied for his junior year how will it affect his financial aid? Thank you again. I feel like I'm in a fire sale now.

Chris 2018-04-17 14:04:24 UTC #4

Or do we take it out of grandmas name and into our name where it affects only us times the lesser rate and won't count as his income. This is sooo confusing. Doing the math if we didn't use it until the spring sophomore year that would be around 10,000 out of our pocket without using the 529 plan and we can't afford that.

dcandmc 2018-04-18 12:48:45 UTC #5

If you wait until spring of sophomore year to use any of grandma's money, there will be zero impact on need-based financial aid, assuming the student graduates in the normal four academic years. If you can transfer the 529 account from grandma's ownership to parent ownership (not all 529 plans allow ownership transfer like this), distributions for the student will no longer count as untaxed income to the student two years after they are made, but the funds will have an immediate financial aid impact as a parent asset.

Chris 2018-04-18 13:37:33 UTC #6

Hi and thank you again :). Unfortunately we won't be able to wait until his sophomore year spring to use it because we don't have those funds set aside. But if I understand it correctly that if we wait and not withdraw until at least his freshman spring term that his senior year is what will be affected financial aid wise and we could keep it in grandmas name or move it to ours around that time. Then that will give us time to save the grant money that he would lose that senior year if that makes sense.