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Updated January 2022.

The 529 plans you set up for your kids have many benefits. But if they’ll seek financial aid to fill the financing gap beyond what you pay, then those 529 plans could pose a problem. This is where some planning…and grandparents…can help. Watch and see how grandma and grandpa might optimize your 529 plan.

Financial Aid 101

First off, a quick lesson in financial aid jargon is in order. Since financial aid is administered by the federal government, of course there are a couple of tongue-twisting acronyms involved.

The form your kids will use to apply for financial aid is the Free Application for Federal Student Aid, or FAFSA®, form.

FAFSA information helps determine the portion of annual education expenses you and your children are expected to pay. This Expected Family Contribution (EFC) gets assessed each time your kids prepare new FAFSA forms…and it may reduce financial aid awards.

Your assets – including 529 plans you own – are included on the FAFSA form. But grandparents’ 529 plans aren’t. So, an easy technique to increase the benefits of 529 plans is to coordinate the timing of who pays expenses.

When to Deploy That 529 Account

Your 529 plan balances will produce an EFC assessment. But it’ll be small, something around 5.60%.1 And even though Grandma and Grandpa’s 529 accounts aren’t included on a FAFSA form, they still have an indirect effect on EFC.

Any expenses grandparents pay from their 529 plans are considered income to a student. That income can potentially be assessed up to 50% when determining EFC.2 But there’s a silver lining. It’s in the timing.

For individuals, a tax year is a calendar year (January to December). A college academic year runs from October to June. It overlaps two tax years. Luckily, FAFSA applications consider a student’s income from two tax years in the past.

So, by carefully timing withdrawals, grandparents may help students avoid the income issue.

For example, expenses paid by grandparents any time during the freshman academic year would be considered income and affect EFC in the student’s junior year. Expenses paid by December 31st in the sophomore year would create that same EFC assessment (and reduce aid) in the senior year.

This is because the “income” shows up on FAFSA forms two tax years into the future. So, grandparents need to be patient.

If they wait to use their 529 accounts, then your kids may be eligible for more financial aid. The trigger point is to wait until January of the sophomore year to start paying expenses. This puts that income into the next tax year, which will never be reportable.

So, an easy technique to increase the benefits of 529 plans may be to use your account for expenses through the first three months of the sophomore year. After that grandparents can pick up expenses for the remainder of your children’s time in college.

That all changes in late 2022. A new, simplified FAFSA form goes into effect on October 1, 2022 for the 2023-2024 academic year. The new form makes distributions from accounts held by "non custodian parents" (i.e., anyone else) not reportable as income to a student. So, those distributions will not be considered for federal aid eligibility.

Looking for Answers About how to Fund a 529 Plan?

If you’re considering a college savings plan for your children or relatives, we can help. Use our College Savings Calculator to get started.

Our Investment Specialists are available to answer questions about the types of plans that may be appropriate in different situations. Shoot us an email to get the conversation started.


1 Federal Student Aid (FSA), U.S. Department of Education, THE EFC FORMULA, 2022–2023, Pages 9 and 13, August 2021.

2 Ibid, Page 10.

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