What to Know About 529 Accounts Owned by Grandparents & the New FAFSA for 2025

Student Finance & Loan Expert

Confused by conflicting information on 529 plans and financial aid? You're not alone. The rules around grandparent-owned 529s and the FAFSA have changed significantly for the 2024-2025 school year. This can be a frustrating minefield for families seeking clarity. As an education and career planning expert, I will help you cut through the clutter, explain the new landscape, and ensure you make informed decisions to maximize your grandchild's educational opportunities. Let's break down the latest FAFSA updates and explore how grandparent-owned 529s can now be a powerful tool for funding your grandchild's future.

Key Things You Need to Know About 529 Accounts Owned by Grandparents and the New FAFSA for 2025

College tuition is rising at around 8% annually, and most low-growth savings options will not be sufficient to keep pace with rising costs.
While contributions can be invested to grow tax-free, many people keep their 529 plans in cash or cash equivalents like CDs or savings accounts.
Investments in the S&P 500, which tracks a large group of stocks, historically deliver an average return of 10% each year and this strong growth potential could significantly boost your college savings.
The Federal Pell Grants for the 2024-25 award year projects a sizable number of new students to be eligible for a Pell Grant, with a substantial number qualifying for the maximum award amount.
A significant portion of U.S. adults are impacted by student loan debt, either currently or in the past, with real-world consequences.
Of those surveyed by Bankrate, many reported delays in buying a house or paying off other debts due to student loans.
Regrets among borrowers abound, with many wishing they had pursued more scholarships, or to work more to reduce their loan burden.
A good number of borrowers felt their education significantly improved their job opportunities and earning potential.

What do I need to know about 529 accounts owned by grandparents and the new FAFSA for 2025?
What are the benefits and drawbacks of using a grandparent-owned 529 under the new FAFSA rules?
What is the the new Student Aid Index (SAI) and how does it compare to the Expected Family Contribution (EFC)?
What should I know about setting up a grandparent-owned 529?
What investment options are available when setting up a 529 plan and how can I maximize them?
What information on 529 beneficiaries should I know about?
What are the key factors to consider when comparing different 529 plans?
Should I Incorporate Graduate Degree Planning Into My Education Funding Strategy?
Can grandparent-owned 529 plans effectively support online graduate education?
What are some myths and misconceptions about 529 accounts owned by grandparents and the new FAFSA?
How does a 529 plan compare with other education financing options?
How can grandparent-owned 529s work alongside other financial tools?
How can leveraging low-interest student loans optimize my overall education funding strategy?
Are no credit check student loans a viable fallback option?
Can accelerated degree programs influence 529 plan strategies?
Can integrating online education options boost my 529 plan strategy?
Can comparing student loan options strengthen my education funding strategy?
How can I assess the credibility and financial aid offerings of online colleges?
Should I adjust my 529 plan asset allocation as my grandchild’s college start date approaches?
Other Things You Should Know About 529 Accounts Owned by Grandparents and the New FAFSA

What do I need to know about 529 accounts owned by grandparents and the new FAFSA for 2025?

The Free Application for Federal Student Aid (FAFSA) recently underwent significant changes, making it much easier for grandparents to help with their grandchild's college savings through 529 plans. Let's break down the good news and what you need to consider:

Benefits for Grandparents

Financial Aid Boost: Previously, distributions from a grandparent-owned 529 plan counted as untaxed student income, potentially reducing financial aid eligibility. Now, these withdrawals are not reported on the FAFSA, maximizing a grandchild's potential aid awards.
Tax Advantages Remain: Contributions to a 529 plan generally grow tax-free, and qualified education expense withdrawals are not federally taxed, allowing grandparents to significantly grow the account for their grandchild's education while minimizing tax impact.

Additional FAFSA Changes (2024)

Simplified Form: The application itself is now streamlined with fewer questions overall, making the process less daunting.
New Need-Analysis Formula: The Student Aid Index (SAI) replaces the Expected Family Contribution (EFC) to determine eligibility for need-based federal grants and scholarships.
Expanded Pell Grant Access: The changes aim to make Pell Grants, a critical need-based federal grant program, more accessible to low-income students. This includes potentially increasing the number of students who qualify and the maximum award amount.
Pell Grant Restoration: Incarcerated students in federal and state penal facilities regained Pell Grant eligibility starting in the 2023-2024 award year. Additionally, students whose Pell Grant eligibility was revoked due to school closure or misconduct can have it restored under certain circumstances.

There is an update to Federal Pell Grants for the 2024-25 award year. An estimated 610,000 new students will be eligible for a Pell Grant, and an additional 1.5 million students will be eligible for the maximum award amount. While the exact maximum award for the 2024-25 year will be announced later, the maximum award for the 2023-24 year was $7,395. These are shown in the graphic below.

What are some stats on Federal Pell Grants?

Things to Consider for Grandparents

Gift Tax Implications: Contributions to a 529 plan may be subject to gift tax if they exceed the annual exclusion amount ($18,000 per donor in 2024). Strategies exist (like contributing smaller amounts over multiple years) to minimize this impact.
Control and Flexibility: Grandparents retain control over the assets (with some limitations) and can designate a new beneficiary if needed. However, the funds must ultimately be used for qualified education expenses to receive the full tax benefits.
State Variations: Benefits and rules can vary depending on the state's 529 plan chosen. Researching state-specific details like tax deductions and matching grants is crucial before opening an account.
Market Fluctuations: The value of the 529 plan can fluctuate depending on the investment options chosen. Grandparents should have a long-term investment horizon to minimize risk.

Overall, the new FAFSA rules make grandparent-owned 529 plans a powerful tool for education savings. Talk to a financial advisor to discuss specific situations and choose a plan that aligns with your goals and your grandchild's future. Remember, you can find the latest updates and resources related to the FAFSA on the official Federal Student Aid website.

In 2023, American families utilized various funding sources to cover college expenses. Parent borrowing played a significant role, with the average Federal Parent PLUS Loan amounting to $9,134. Private education loans also contributed an average of $5,414. Additionally, families utilized home equity loans or HELOCs for an average of $3,553, and parent credit cards for an average of $3,289. Retirement account loans and other parent loans averaged $2,762 and $4,304 respectively.

Student borrowing also played a part in financing college education. On average, federal student loans amounted to $7,253. Private student loans saw a higher average of $9,337. Student credit cards and other student loans contributed an average of $1,448 and $4,275 respectively. These are shown in the graph below.

It's important to note that these are just averages, and the actual amount borrowed by individual families can vary depending on their specific circumstances.

What are the benefits and drawbacks of using a grandparent-owned 529 under the new FAFSA rules?

The following are some of the benefits and drawbacks of using a grandparent-owned 529 under the new FAFSA rules:

Benefits

1. Increased Financial Aid Eligibility

Previously, distributions from a grandparent-owned 529 were considered untaxed income for the student, potentially reducing their eligibility for need-based financial aid.
Under the new FAFSA rules, these withdrawals are no longer reported as income, maximizing potential aid awards.
Under the new FAFSA rules implemented in 2024, withdrawals from a grandparent-owned 529 plan do not affect your eligibility for need-based financial aid.
This is a significant change from the previous system where such withdrawals were counted as untaxed income and could potentially reduce your aid award.
The new FAFSA simplifies the process by not requiring students to report cash support, including contributions from grandparent-owned 529 plans.

2. Tax Advantages

Contributions to a 529 plan generally grow tax-free and withdrawals used for qualified education expenses are not taxed federally.
This allows grandparents to significantly grow the account for their grandchild's education while minimizing tax impact.

3. Flexibility

529 plans can now be used for a wider range of qualified education expenses, including K-12 tuition (depending on state rules) and apprenticeship programs.
This provides more options for grandparents to support their grandchild's educational journey.

4. Control Over Assets

Grandparents retain control over the assets in 529 accounts owned by grandparents, allowing them to designate a new beneficiary if needed.
This can be helpful if the original beneficiary decides not to pursue higher education.

Drawbacks

1. Gift Tax Implications

Contributions to a 529 plan may be subject to gift tax if they exceed the annual exclusion amount ($18,000 per donor in 2024).
Grandparents can use gift tax strategies to minimize this impact.

2. Loss of Control Over Funds

While grandparents can change beneficiaries, ultimately the funds must be used for qualified education expenses to receive the full tax benefits.
This may not be ideal if the grandchild chooses a non-traditional educational path.

3. State-Specific Variations

Benefits and rules can vary depending on the state's 529 plan chosen.
Researching state-specific details is crucial before opening an account.

4. Market Fluctuations

The value of the 529 plan can fluctuate depending on the investment options chosen.
Grandparents should have a long-term investment horizon to minimize risk.

Overall, the new FAFSA rules make grandparent-owned 529 plans a much more attractive option for saving for a grandchild's education. However, it's important to weigh both the benefits and drawbacks, consider gift tax implications, and choose a plan that aligns with your financial goals and the grandchild's educational aspirations.

For those saving for education expenses through a 529 plan, in 2024, individuals can contribute up to $18,000 per beneficiary annually without incurring a gift tax. This amount doubles to $36,000 for married couples filing jointly. This allows parents, grandparents, and other contributors to significantly boost a child's college savings. There's an additional strategy called "accelerated gifting" that allows contributions for up to five years to be made in a single lump sum. This translates to $90,000 for an individual or $180,000 for a couple.

While contributions can be invested to grow tax-free, around 50% of Americans keep their 529 plans in cash or cash equivalents like CDs or savings accounts. However, with college tuition rising at around 8% annually, these low-growth options won't be sufficient to keep pace with rising costs. Investing in the S&P 500 which tracks a large group of stocks historically delivers an average return of 10% each year. This strong growth potential could significantly boost your college savings. These are shown in the graphic below.

What are some stats on 529 Plans and savings in the USA?

What is the the new Student Aid Index (SAI) and how does it compare to the Expected Family Contribution (EFC)?

The new Student Aid Index (SAI) is the successor to the Expected Family Contribution (EFC) used in the FAFSA application process. Here's a breakdown of how they compare:

Expected Family Contribution (EFC)

Function: The EFC was a formula-based index number used to determine a family's expected contribution towards a student's college education costs.
Calculation: It considered taxed and untaxed income, assets, and benefits of both the student and their parents/spouse (if applicable).
Impact: Schools used the EFC to determine a student's eligibility for various federal student aid programs, such as Pell Grants and subsidized loans. A lower EFC indicated greater financial need and potentially qualified the student for more aid.

New Student Aid Index (SAI)

Function: The SAI serves the same basic purpose as the EFC – to gauge a student's financial need and determine eligibility for need-based federal student aid.
Calculation: The exact formula for the SAI isn't publicly available, but it's believed to be similar to the EFC, considering income, assets, and benefits. However, a key difference is that the number of family members in college is no longer factored in.
The Student Aid Index (SAI): a number (between -$1,500 and 999999) colleges use to estimate your financial need for aid. A lower SAI means you likely need more financial help.
Important to remember: It's not the exact amount of aid you'll get. It doesn't tell you what your family is expected to contribute. And it's not your final financial aid offer.
A tool for financial aid professionals: They use the information you provide on the FAFSA to calculate your SAI and then create your personalized aid offer. You'll see an estimated SAI on your FAFSA confirmation and a final one after processing.
Negative Values: Unlike the EFC (which couldn't be negative), the SAI can go as low as -1,500. This allows financial aid administrators to offer more targeted support to students from especially challenging economic backgrounds.
Potential for More Aid: The exclusion of family size in the SAI calculation could potentially increase financial aid eligibility for students with multiple siblings attending college simultaneously.

Overall, the SAI aims to streamline the needs assessment process and potentially increase access to need-based financial aid for a broader range of students.

What should I know about setting up a grandparent-owned 529?

Grandparent-owned 529 plans offer a fantastic way to help your grandchild achieve their educational dreams. Here's what you need to know to get started:

The Process of Opening a 529 Plan

Opening a 529 plan is relatively straightforward.
You can choose a plan directly from your state or another state offering a plan that aligns with your goals.
Most plans allow online enrollment, but some may require paper applications.

Choosing a State's 529 Plan

While some states offer tax benefits for contributions to their own plans for residents, others may have lower fees or more attractive investment options.
Consider factors like state tax benefits (if applicable), investment choices, fees, and flexibility when making your decision.
Researching plan details online or consulting a financial advisor can be helpful.

Federal Contribution Limits

Federal regulations set annual contribution limits for 529 plans, regardless of who owns the account.
In 2024, the limit is $16,000 per beneficiary, per year.
However, some states may have lower contribution limits.

Fees Associated with Grandparent-Owned 529s

There are typically two main types of fees associated with 529 plans: program management fees and investment fees.
Program management fees cover administrative costs, while investment fees depend on the investment options chosen within the plan.

Additional Tips

Consider Gift Taxes: Contributions to a 529 plan may be subject to gift taxes if they exceed the annual exclusion amount ($18,000 per donor in 2024). Strategies exist, like contributing smaller amounts over multiple years to minimize this impact.
Beneficiary Designation: As the owner, you can designate a beneficiary for the 529 plan. You can also change the beneficiary if needed, although there may be tax implications.
Long-Term Investment Horizon: Remember, 529 plans are meant for long-term educational savings. Choose an investment strategy that aligns with your grandchild's future education timeline and your risk tolerance.

By understanding these key points, you can confidently set up a grandparent-owned 529 plan and help secure your grandchild's educational future. Remember, consulting with a financial advisor can be beneficial for personalized guidance tailored to your specific situation and goals.

A 2024 study by Sallie Mae found disparities in how parents from different racial and ethnic backgrounds contribute to their children's college costs. On average, parents cover 22% of the total college cost. However, this breaks down differently by race/ethnicity. College graduates by race mostly fund their education via parental or family money and student aid and loans.

White families contribute the most from current income, averaging 21%. They also utilize college savings plans like 529s more heavily, averaging 10% compared to the overall average of 9%. Black families rely more on current income (22%) but have significantly lower contributions from college savings plans (5%) and other savings/investments (5%). Hispanic families fall somewhere in between, with current income averaging 20%, college savings plans at 7%, and other savings/investments at 7%. Interestingly, Black families withdraw a higher percentage (4%) from retirement savings for college expenses compared to White (2%) and Hispanic (3%) families.

These are shown in the following graph.

What investment options are available when setting up a 529 plan and how can I maximize them?

Grandparent-owned 529 plans offer a variety of investment options to grow your grandchild's educational savings. Here's a breakdown of the choices and strategies to maximize their potential:

Types of Investment Options

Age-Based Portfolios: These automatically adjust asset allocation (the mix of stocks, bonds, and cash) as your grandchild nears college age. They start aggressive (higher potential growth) and become more conservative (lower risk) over time.
Static Portfolios: These offer a fixed asset allocation, allowing you to choose a risk level that aligns with your investment horizon (timeframe until your grandchild needs the funds) and your risk tolerance.
Individual Investment Options: Some plans allow you to choose specific mutual funds within the plan, offering more control over the investment strategy.

Maximizing Growth Strategies

Start Early: The power of compound interest is significant. Starting a 529 plan early allows contributions to grow over a longer period.
Risk Tolerance and Time Horizon: Consider your comfort level with investment risk and how long it will be until your grandchild needs the funds. A longer time horizon allows for a more aggressive strategy with potentially higher returns.
Asset Allocation: Generally, younger children benefit from a more aggressive portfolio with a higher percentage of stocks for potential growth. As your grandchild nears college age, consider shifting to a more conservative allocation with a higher percentage of bonds to preserve capital.
Low-Cost Options: Choose plans with low investment fees to maximize returns within the account.
Professional Guidance: Consulting a financial advisor can be valuable for creating a personalized investment strategy tailored to your specific goals and risk tolerance.

Remember: Investment performance can fluctuate over time. Don't make drastic changes based on short-term market movements. The primary goal is to grow the 529 plan for your grandchild's future education.

By understanding the investment options and utilizing these strategies, you can leverage a grandparent-owned 529 plan to significantly contribute to your grandchild's educational success.

What information on 529 beneficiaries should I know about?

There is much information you need to know about 529 beneficiaries, as follows:

Changing Beneficiaries

Flexibility: Yes, you can typically change the beneficiary of a grandparent-owned 529 plan. This allows you to redirect the funds to another qualified beneficiary (like another grandchild) if needed.

What Happens If the Beneficiary Doesn't Go to College

There are a few options when the beneficiary doesn't go to college (for various reasons, including not wanting to go to college or inability to do so).

Change Beneficiary: You can designate a new qualified beneficiary.
Non-Qualified Withdrawals: You can withdraw the funds, but any earnings accrued in the plan may be subject to income tax and a 10% penalty.
K-12 Expenses (State Dependent): Some states allow using 529 funds for qualified K-12 education expenses (private school tuition, for example). Check your specific state's plan for details.

Using 529 Plans for Vocational Schools

Federally, 529 plans can now be used to pay for qualified expenses at apprenticeship programs registered with the Department of Labor.
However, using them for other vocational or trade schools may depend on the specific program and state regulations.
Always check the program's eligibility and your state's 529 plan details.

Scholarship Funds and Unused 529 Money

If your grandchild receives a scholarship and doesn't need all the 529 funds, you have a few choices:

Reduce Future Contributions: Scale back on your contributions to the plan.
Change Beneficiary: Designate another qualified beneficiary for future use.
Non-Qualified Withdrawal (with Penalty): Withdraw the funds, but be aware of potential tax implications on earnings.

Using 529 Plans for International Education

Generally, 529 plans can be used for qualified educational expenses at accredited institutions in the United States.
There may be limited exceptions for certain foreign programs approved by the Department of Education.
It's best to consult with your state's 529 plan administrator regarding international use.

A 2022 Bankrate survey revealed that a significant portion of U.S. adults (36%) are impacted by student loan debt, either currently or in the past. This debt has real-world consequences, with about 25% of those surveyed reporting delays in buying a house or paying off other debts due to student loans.

The survey also explored regrets among borrowers. Looking back, 23% wished they had pursued more scholarships, and 20% said they would have preferred to work more to reduce their loan burden. However, the survey also found a positive takeaway. 35% of borrowers felt their education significantly improved their job opportunities and earning potential. Financial stress can have a significant mental toll - nearly half (47%) of those experiencing money-related mental health struggles identified student loan debt as a major factor. These are shown in the graphic below.

What are some student loan debt stats in the USA?

What are the key factors to consider when comparing different 529 plans?

When comparing different 529 plans, especially for a grandparent-owned account, there are several key factors to weigh to ensure you choose the best option for your grandchild's future education and your financial goals:

State Tax Benefits (if applicable)

Residence vs. Plan State: Some states offer tax benefits (like deductions or credits) for contributions to their own 529 plans for residents. However, plans from other states may have lower fees or more attractive investment options.

Investment Options

Risk Tolerance and Time Horizon: Consider your comfort level with investment risk and how long it will be until your grandchild needs the funds. Age-based portfolios can be a good option, or you may choose a static portfolio with a specific asset allocation.
Fees: There are typically two main types of fees: program management fees (administrative costs) and investment fees. Choose a plan with low fees to maximize growth within the account.
Flexibility: Some plans offer a wider range of investment options, allowing for more control over the investment strategy.

Contribution Limits and Gift Taxes

Federal Limits: Federal regulations set annual contribution limits for 529 plans, regardless of who owns the account. In 2024, it's $18,000 per beneficiary, per year. Some states may have lower limits.
Gift Taxes: Contributions to a 529 plan may be subject to gift taxes if they exceed the annual exclusion amount ($18,000 per donor in 2024). Strategies exist (like contributing smaller amounts over multiple years) to minimize this impact.

Additional Considerations

Beneficiary Designation and Flexibility: Can you change the beneficiary if needed? Are there limitations?
Account Management Features: Consider online access, ease of use, and customer service options.
Use of Funds Beyond College (if applicable): Does the plan allow qualified withdrawals for K-12 expenses or apprenticeship programs (depending on your state)?
Long-Term Investment Horizon: Remember, 529 plans are meant for long-term educational savings.

By carefully considering these factors, you can compare different 529 plans and choose the one that best aligns with your goals for your grandchild's education and your own financial situation.

Consulting with a financial advisor can be especially helpful for personalized guidance tailored to your specific circumstances.

Should I Incorporate Graduate Degree Planning Into My Education Funding Strategy?

Considering future educational needs is vital for a robust financial strategy. Integrating plans for graduate education can help balance long-term funding and address potential cost gaps that 529 savings alone might not cover. Evaluating cost-effective graduate options, such as the cheapest easiest masters degree, provides additional avenues for reducing future financial burdens. This approach involves assessing program duration, potential return on investment, and available financial aid options to ensure that advanced education costs are efficiently managed alongside undergraduate funding efforts.

Can grandparent-owned 529 plans effectively support online graduate education?

Leveraging grandparent-owned 529 plans can extend to funding graduate education, particularly through online programs that offer flexibility and cost efficiency. Strategic allocation of 529 funds for graduate studies can help mitigate rising tuition costs while preserving financial aid eligibility. This approach may be particularly valuable when considering programs offered by the easiest online grad schools to get into, where lower overhead and innovative delivery models align with modern career advancement needs.

What are some myths and misconceptions about 529 accounts owned by grandparents and the new FAFSA?

The new FAFSA rules have made 529 accounts owned by grandparents a much more attractive option for saving for a grandchild's education. However, some misconceptions persist. Let's clear them up:

Myth #1: Grandparent-Owned 529s Reduce Financial Aid Eligibility
Fact: Under the new FAFSA rules, distributions from a grandparent-owned 529 plan are not reported on the application. This means they no longer have a negative impact on a student's financial aid eligibility. This is a significant change from the previous system where such withdrawals were counted as untaxed income.
Myth #2: Grandparents Lose Control of the Money in a 529 Plan
Fact: While there are some limitations, grandparents generally retain control over the assets in the plan. They can designate a new beneficiary if needed (like another grandchild). However, to receive the full tax benefits, the funds must ultimately be used for qualified education expenses.
Myth #3: 529 Plans Are Only for College
Fact: The definition of qualified educational expenses has expanded. While college remains the primary focus, 529 plans can now be used for expenses at apprenticeship programs registered with the Department of Labor (depending on the program). Some states even allow using them for qualified K-12 education expenses.
Myth #4: You Can't Use a 529 Plan for International Education
Fact: This one requires some clarification. Generally, 529 plans are for accredited institutions in the U.S. However, there may be limited exceptions for certain foreign programs approved by the Department of Education. It's best to consult with your state's 529 plan administrator regarding international use.
Myth #5: The New FAFSA is More Complicated
Fact: The new FAFSA is actually simpler than before. The application has been streamlined with fewer questions overall, making the process less daunting for students and families.Remember: Consulting with a financial advisor can be beneficial to clarify any remaining questions and ensure you choose a 529 plan that aligns with your specific goals and your grandchild's future educational aspirations.
Myth #6: Grandparents Need a Large Amount of Money to Start a 529 Plan
Fact: Many 529 plans allow you to start small with automatic contributions. Even modest contributions can grow significantly over time, especially with the power of compound interest. Focus on consistent contributions that fit your budget.
Myth #7: All 529 Plans Are Created Equal
Fact: There are significant differences between state-sponsored 529 plans. Consider factors like investment options, fees, and state tax benefits (if applicable) when choosing a plan. Researching your options and potentially consulting a financial advisor can help you make an informed decision.
Myth #8: You Can Only Have One 529 Plan per Grandchild
Fact: There's no limit on the number of 529 plans you can contribute to for a single beneficiary. This allows grandparents and other family members to contribute to different plans, potentially offering a wider range of investment options and tax benefits.
Myth #9: 529 Plans Are Only for Grandparents
Fact: Anyone can open a 529 plan for a qualified beneficiary, not just grandparents. Parents, aunts, uncles, or even friends can contribute to a child's future education through a 529 plan.
Myth #10: The New FAFSA Eliminated the Need for All Financial Aid Documents
Fact: While the new FAFSA simplifies the process, some documentation may still be required depending on your specific financial situation.

It's always best to check the official FAFSA website and consult with a financial aid advisor at your grandchild's school for the latest requirements.

How does a 529 plan compare with other education financing options?

When planning for your grandchild's education, it's essential to compare 529 plans with other education financing options to understand their advantages and limitations. While 529 plans provide unique tax benefits and flexibility, they are not the only solution available.

529 Plans vs. Coverdell Education Savings Accounts (ESAs)

Both 529 plans and ESAs offer tax-free growth on investments, but there are notable differences. ESAs permit a broader range of qualified expenses, including K-12 private tuition, while 529 plans are primarily geared toward postsecondary education. However, ESAs have a relatively small annual contribution limit of $2,000 per beneficiary and come with income-based eligibility restrictions.

529 Plans vs. Custodial Accounts (UTMA/UGMA)

Custodial accounts provide more flexibility in how funds are used, but they have less favorable financial aid implications as assets are considered the student's property. Unlike a 529 plan, which grows tax-free when used for education, earnings in custodial accounts are subject to taxes.

529 Plans vs. Savings Bonds

Series EE and I savings bonds offer a safe, low-risk way to save for education. These bonds allow interest to grow tax-deferred, and their earnings can be tax-free for qualified educational expenses if income thresholds are met. However, their growth potential is generally much lower compared to well-diversified investment options within a 529 plan.

529 Plans vs. Student Loans

While 529 plans help families save in advance, student loans are a borrowing solution to cover any remaining gaps in funding. Federal and private loans, including options with a variable interest rate student loan, should be considered cautiously due to the potential long-term financial burden on the borrower.

529 Plans vs. Traditional Savings Accounts

Traditional savings accounts and CDs may be a safer option for risk-averse investors. However, they typically yield smaller returns and lack the tax-advantaged growth seen in 529 plans, making them less ideal for long-term education savings goals.

Which Option is Best for You?

529 plans continue to offer compelling benefits for education financing under the new FAFSA rules, but the right choice ultimately depends on your goals, financial situation, and the age of the student. By thoroughly evaluating all options, you can create a diversified strategy to best support your grandchild's educational aspirations. For questions about bridging funding gaps, be sure to explore alternatives like a variable interest rate student loan for added flexibility.

How can grandparent-owned 529s work alongside other financial tools?

While the advantages of grandparent-owned 529 plans are significant under the revised FAFSA rules, combining them with complementary financial tools can maximize educational funding strategies. A diversified approach ensures families have multiple resources to draw from without over-reliance on one option.

For instance, private student loan options can bridge remaining funding gaps after 529 savings and federal financial aid have been utilized. These loans offer flexible repayment terms and can be tailored to align with the borrower’s cash flow and credit situation. Incorporating these alongside 529 plans allows families to address any sudden tuition increases or additional expenses such as housing and textbooks.

Additionally, families can also consider strategies like tax-advantaged savings bonds or custodial accounts depending on their goals and risk tolerance. While each of these tools comes with its own pros and cons, aligning them with a grandparent-owned 529 can create a more robust financial plan to support educational aspirations.

As educational costs continue rising, exploring a mix of options ensures that families are prepared for various financial scenarios. Proper planning not only helps build educational opportunities but also minimizes the long-term financial stress of funding them.

How can leveraging low-interest student loans optimize my overall education funding strategy?

Diversifying your financing approach by incorporating low-interest student loans can enhance your education funding strategy when combined with a grandparent-owned 529 plan. Evaluating loan products with competitive rates offers a pathway to managing short-term funding gaps without significantly increasing long-term debt burdens. Compare terms, assess repayment flexibility, and monitor market trends to ensure that any borrowed funds contribute to a balanced portfolio focused on minimizing total education costs. For an in-depth loan comparison and to explore options such as the cheapest student loans, consider consulting with a financial advisor to align these strategies with your overall financial goals.

Are no credit check student loans a viable fallback option?

In cases where gaps remain after leveraging a grandparent-owned 529 plan alongside other financial tools, borrowers may consider supplemental financing. For those with limited credit history, no credit check student loans offer an alternative funding source, though they typically carry higher interest rates and less flexible repayment terms. Evaluating long-term repayment capacity and its impact on overall financial strategy is essential when integrating this option into a diversified education funding plan.

Can accelerated degree programs influence 529 plan strategies?

Accelerated degree programs can shorten the duration of academic funding needs, potentially shifting the investment horizon for a grandparent-owned 529. This adjustment may lead to strategies that favor a more conservative asset allocation, reducing exposure to market volatility while ensuring tax-efficient withdrawals precisely timed with tuition payments. Additionally, evaluating innovative education options such as fast track degrees can offer insights into programs that complete the education cycle faster, allowing for a tighter alignment between asset growth and education expenses. Financial planners should consider program duration, cost structure, and anticipated financial aid interactions to optimize overall strategy.

Can integrating online education options boost my 529 plan strategy?

Evaluating accredited online programs can complement a grandparent-owned 529 plan by potentially lowering overall tuition costs while maintaining quality education. This strategy involves comparing program accreditation, curriculum relevance, and financial aid eligibility with traditional on-campus options. Families may benefit from exploring cost-efficient alternatives such as cheap online colleges that accept FAFSA to create a balanced and sustainable education funding approach.

Can comparing student loan options strengthen my education funding strategy?

Diversifying education financing can benefit from a thorough evaluation of traditional student loan providers to complement a grandparent-owned 529 plan. Analyzing interest rates, repayment terms, and eligibility requirements helps identify loan products that minimize overall borrowing costs and align with long-term financial goals. In this context, assessing competitive offerings provides valuable insights when supplemental funding becomes necessary. For instance, reviewing comprehensive comparisons, such as Is Discover student loan better than Sallie Mae?, can support informed decision-making and further enhance a robust, integrated education funding strategy.

How can I assess the credibility and financial aid offerings of online colleges?

When evaluating online colleges to complement your 529 plan strategy, focus on accredited institutions that demonstrate strong academic outcomes and robust student support. Investigate the school’s recognition by legitimate accrediting bodies, graduation rates, and post-graduate employment statistics to ensure long-term value. Additionally, compare tuition costs, available scholarships, and financial aid packages to maintain affordability. Utilize trusted resources, such as online colleges that offer financial aid, to access comprehensive data on cost structures and aid eligibility, thereby solidifying your decision-making process without overlapping established 529 plan benefits.

Should I adjust my 529 plan asset allocation as my grandchild’s college start date approaches?

Strategically rebalancing 529 investments in line with the beneficiary’s timeline can safeguard gains and reduce exposure to market volatility. As the start date for college nears, shifting from aggressive to conservative asset allocations may preserve capital for tuition expenses and other qualified costs. An accelerated academic path, such as pursuing the fastest accelerated bachelor's degree online, can shorten the investment horizon and necessitate earlier adjustments. Regularly reviewing the portfolio and aligning the asset mix with evolving risk tolerance and enrollment timelines supports a more resilient education funding strategy.

Key Findings

Updates to Federal Pell Grants for the 2024-25 award year include an estimated 610,000 new students eligible for a Pell Grant
An additional 1.5 million students will be eligible for the maximum Pell Grant award amount.
The maximum Pell Grant award for the 2023-24 year was $7,395.
For those saving for education expenses through a 529 plan, in 2024, individuals can contribute up to $18,000 per beneficiary annually without incurring a gift tax.
This amount is $36,000 for married couples filing jointly.
"Accelerated gifting" that allows contributions for up to five years to be made in a single lump sum is $90,000 for an individual or $180,000 for a couple.
Around 50% of Americans keep their 529 plans in cash or cash equivalents like CDs or savings accounts.
However, with increasing tuition fees for rising at a rate of around 8% annually, these low-growth options won't be sufficient to keep pace with rising costs.
The S&P 500 historically delivers an average return of 10% each year.
A significant portion of U.S. adults (36%) are impacted by student loan debt, either currently or in the past.
This debt has real-world consequences, with about 25% of those surveyed reporting delays in buying a house or paying off other debts due to student loans.
Looking back, 23% wished they had pursued more scholarships, and 20% said they would have preferred to work more to reduce their loan burden.
35% of borrowers felt their education significantly improved their job opportunities and earning potential.
Nearly half (47%) of those experiencing money-related mental health struggles identified student loan debt as a major factor.
A 2024 study by Sallie Mae found that on average, parents cover 22% of the total college cost.
White families contribute the most from current income, averaging 21%.
White families utilize college savings plans like 529s more heavily, averaging 10% compared to the overall average of 9%.
Black families rely more on current income (22%) but have significantly lower contributions from college savings plans (5%) and other savings/investments (5%).
Hispanic families fall somewhere in between, with current income averaging 20%, college savings plans at 7%, and other savings/investments at 7%.
Interestingly, Black families withdraw a higher percentage (4%) from retirement savings for college expenses compared to White (2%) and Hispanic (3%) families.
In 2023, various funding sources to cover college expenses showed that parent borrowing played a significant role, with the average Federal Parent PLUS Loan amounting to $9,134.
Private education loans also contributed an average of $5,414.
Additionally, families utilized home equity loans or HELOCs for an average of $3,553, and parent credit cards for an average of $3,289.
Retirement account loans and other parent loans averaged $2,762 and $4,304 respectively.
Student borrowing also played a part in financing college education, and on average, federal student loans amounted to $7,253.
Private student loans saw a higher average of $9,337.
Student credit cards and other student loans contributed an average of $1,448 and $4,275 respectively.

Other Things You Should Know About 529 Accounts Owned by Grandparents and the New FAFSA

What are some strategies for maximizing the tax benefits when withdrawing from a 529?

Here are some strategies to maximize the tax benefits when withdrawing from 529 accounts owned by grandparents:

Planning and Contribution Strategies

Start Early: The power of compound interest is significant. Contributing to a 529 plan early allows earnings to grow tax-free over a longer period.
Maximize Contribution Limits: Contribute up to the annual limit ($18,000 per beneficiary in 2024) if your financial situation allows. Some states may have lower limits, so check your specific plan.
Consider Gift Tax Implications: Contributions exceeding the annual gift tax exclusion amount ($18,000 per donor in 2024) may be subject to gift taxes.
Strategies: Contributing smaller amounts over multiple years or utilizing the "five-year gift tax rule" can help minimize this impact.
Consult with a tax advisor for personalized guidance.

Withdrawal Strategies

Track Qualified Expenses: Keep detailed records of all qualified educational expenses, including tuition, mandatory fees, books, supplies, and even room and board (if the student lives on campus).
Distribute Wisely: Withdraw only the amount needed to cover qualified expenses in a given year. Avoid unnecessary withdrawals that could result in taxes and penalties on earnings.
Multiple Beneficiaries: If you have a 529 plan for multiple beneficiaries, prioritize withdrawals for the child with the highest education expenses first. This helps maximize the tax benefits within the contribution limits.
Scholarship Coordination: If your grandchild receives a scholarship, coordinate 529 plan withdrawals to cover remaining qualified expenses after the scholarship amount is deducted. This helps minimize potential taxes and penalties on unused earnings.
K-12 Expenses (State Dependent): Some states allow using 529 funds for qualified K-12 education expenses (private school tuition, for example). Check your specific state's plan for details on this benefit.

Additional Tips

Review Plan Guidelines: Each 529 plan may have specific rules regarding withdrawals. Familiarize yourself with your plan's guidelines to ensure you comply and maximize tax benefits.
Consult with a Tax Advisor: Tax laws can be complex. Consulting with a tax advisor can ensure you're following the latest regulations and maximizing the tax benefits of your 529 plan withdrawals.

By implementing these strategies, you can significantly reduce or even eliminate taxes and penalties when withdrawing from a 529 plan to help your grandchild achieve their educational goals.

Remember, planning ahead and understanding the rules are key to maximizing the tax benefits of this valuable education savings tool.

Are there any other financial options aside from 529 plans?

Yes, there are several other financial options available for education savings besides 529 plans. While 529 plans offer significant tax advantages and flexibility under the new FAFSA rules, here are some alternatives to consider depending on your situation:

1. Coverdell Education Savings Accounts (ESAs)

These accounts offer tax-free growth on contributions and withdrawals used for qualified educational expenses (K-12 private school included, unlike 529 plans). However, contribution limits are lower than 529 plans ($2,000 per beneficiary per year in 2024), and there are income limitations for eligibility.

2. UTMA/UGMA Custodial Accounts

These accounts allow you to invest on behalf of a minor (child or grandchild). While earnings can grow tax-free, the assets belong to the minor when they reach the age of majority (varies by state). This can potentially impact financial aid eligibility and future financial planning for the beneficiary.

3. Savings Accounts and Certificates of Deposit (CDs)

While not offering tax benefits like 529 plans, these accounts provide a safe place to save for education with some potential for growth. However, returns are typically lower compared to investment options within a 529 plan.

4. Employer Sponsored Savings Plans

Some employers offer education savings plans that may allow pre-tax contributions for employee's children's education. These plans can offer tax advantages, but contribution limits and eligibility requirements may vary.

Choosing the Right Option

The best financial option for you will depend on your specific circumstances. Here are some factors to consider:

Age of the Beneficiary: For younger children, a 529 plan may be ideal for long-term growth. For older children nearing college, a more accessible option like a savings account might be suitable.
Tax Advantages: 529 plans and ESAs offer tax-free growth and withdrawals for qualified expenses. Consider the tax implications of each option.
Investment Goals: Think about your risk tolerance and desired growth potential for education savings.
Financial Aid Impact: While the new FAFSA rules make 529 plans less likely to affect aid eligibility, understand how each option might impact financial aid calculations.

Consulting with a financial advisor can be especially helpful in navigating these options and choosing the one that best aligns with your specific goals and financial situation.

What resources can I consult about 529 accounts owned by grandparents and the new FAFSA?

Here are some valuable resources you can consult to learn more about grandparent-owned 529 accounts and the new FAFSA rules:

Government Websites

Federal Student Aid (FAFSA): This is the official website of the U.S. Department of Education for federal student aid, including the FAFSA application and information about the new changes:
Savingforcollege.gov: This government resource provides comprehensive information about 529 plans, including state-specific details and tax benefits.

Non-Profit Organizations

The College Board: This non-profit organization offers resources for college planning and financial aid, including information about 529 plans and the FAFSA.
National Association of State Treasurers (NAST): NAST provides information and resources about state-sponsored 529 college savings plans:

Financial Industry Resources

Investment Companies/Financial Advisors: Many investment companies and financial advisors offer guidance on 529 plans, including choosing a plan, investment options, and tax implications.

Additional Tips

Utilize online search tools to compare different state-sponsored 529 plans based on their features, fees, and investment options.
Consider attending financial aid workshops or webinars offered by schools or community organizations.

Remember, the resources listed above are starting points. Don't hesitate to consult with a trusted financial advisor to discuss your specific situation and receive personalized advice tailored to your goals for your grandchild's education.

References:

Bankrate. (2024). 529 tips for grandparents. Bankrate.
Helhoski, A. (2024, April 24). FAFSA rules: 529 plan 'grandparent loophole' for financial aid closes. USA Today.
Sallie Mae. (2023). How America Pays for College 2023. Sallie Mae.
U.S. Department of Education, Federal Student Aid. (2024). 7 Key Changes Coming to the 2024–25 FAFSA® Experience. U.S. Department of Education.