The stimulus bill passed at the end of 2020 also included some significant changes to how grandparent contributions are treated on the FAFSA.
According to financial aid expert Mark Kantrowitz, cash contributions from grandparents, including distributions from grandparent-owned 529 plans and direct tuition payments to colleges, will no longer hurt a student’s eligibility for need-based financial aid.
The changes go into effect for the 2023-24 school year. Because the FAFSA uses tax information from 2 years prior, the 2023-24 school year will use 2021 tax information.
The previous rules have been hard to navigate and frustrating for many families. Well-intended grandparents could actually harm a grandchild’s ability to get need-based financial aid because the grandparent contribution was treated by the FAFSA as untaxed income to the grandchild and assessed at a rate of 50 percent (compared to only 5.64 percent if the 529 plan was owned by the parents). If a grandparent distributed $20,000 to a grandchild, it could have reduced his or her aid by $10,000.
The strategy to avoid that potential aid reduction was to delay distributions until the grandchild’s junior year of college so that it would not show up on the FAFSA. However, that strategy is no longer necessary and grandparents will be able to contribute immediately when a grandchild begins college without worrying about the potential consequence of reducing eligibility for need-based aid.
Grandparents can gift up to $30,000 per year as a couple ($15,000 per grandparent) before facing any gift taxes, but directly paying college tuition can exceed the annual gifting limit without penalty.
Families considering those options would be wise to consult with a financial planner along with the experts at College Inside Track to identify the best strategy for all of the financial goals the grandparents wish to achieve.