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Most parents who have kids within two years of college enrollment know about the FAFSA—the Free Application for Federal Student Aid. Each year, thousands of parents and students fill out the application and provide the required family financial data in order to qualify for education grants, student loans, work-study programs, and other forms of financial support for the costs of higher education.
In years past, the form required answering as many as 108 questions along with uploading your tax return information for processing. But with the 2020 passage of the FAFSA Simplification Act, the process has been streamlined and shortened in an attempt to make it easier for parents and students while expanding opportunities for more applicants. The new, revised form for 2024–25 is now available online. Here are some highlights of the changes.
Speaking of the FAFSA, here’s a bit more good news for grandparents using 529 education plans to help fund a grandchild’s college expenses. One of the advantages for grandparents using these plans is that the funds held the plan enjoy tax-free growth within the plan and are not counted as taxable income when disbursed for qualified educational expenses. Another plus is that when the plan is owned by a grandparent, the assets in the plan are not required to be disclosed on the FAFSA application. This means that they are not included in the calculation for the SAI (what used to be called the EFC—expected family contribution). In other words, the assets in the grandparents’ 529 plan would not prevent the grandchild from qualifying for a higher level of student aid.
There used to be a pitfall that could occur when funds were disbursed from a 529 plan, particularly when the owner of the plan was the student’s grandparent. The problem arose when the student filed their FAFSA for the next academic year, because the funds from 529 plans used to pay for the student’s educational expenses had to be reported as tax-free income to the student. For example, if a grandparent ordered a disbursement from her 529 plan to pay for a granddaughter’s freshman-year college expenses in 2022, those funds would show up on the granddaughter’s 2024 FAFSA, reducing the amount of financial aid she will be granted for that year by as much as 50% of the amount of the disbursement.
The good news with the new FAFSA is that the FAFSA Simplification Act no longer requires disbursements from 529 plans owned by a student’s relatives to be reported. This means that a withdrawal from a 529 owned by a grandparent (or other family and friends) is no longer included as untaxed income, meaning it won’t directly impact student aid calculation.
There’s also another way to make funds available and reduce the impact on the student’s subsequent financial aid. Suppose a student is looking at a total college bill of $45,000, and financial aid will only cover $35,000 of it. The grandparent could shift partial ownership to the parents of the student, giving them just enough of her 529 plan to cover the $10,000 gap. The parents can use these funds to pay for qualified educational expenses without triggering income to the student. The only tricky part of this strategy is making sure that the 529 plan sponsor will not list the partial ownership change as a distribution that triggers income tax and a 10% penalty. Most plan sponsors will not, but anyone considering this strategy will need to be certain before proceeding.
At Aspen Wealth Management, we know how important it is for our clients to give their children the best possible start in life, and education is a central focus. If you have questions about education funding or other important financial topics, we’re here to help. By the way, watch for news about our upcoming webinar on the latest changes to the FAFSA. To learn more about 529 plans, visit our website to read our article, “Your 529 Plan and SECURE 2.0.”