529 funded by grandparents

Paying for College
1

I just found out that my mother has a 529 account for my son. After a quick browse, my understanding is that, currently as it stands, the funds are her assets (she being the grandparent), so not subject to being reported on any of the financial aid forms (FAFSA, CSS). But if and when my son needs the funds and withdraws from the account, then it will become his asset/income.

Is this correct? Just wanted to confirm because I’ve already submitted the CSS to a few schools. We’re not planning to use those funds for freshman year, so the submitted CSS profiles are still valid (assuming my understanding is correct.)

2

Not quite. See http://www.finaid.org/savings/loophole.phtml

However,

See http://www.forbes.com/sites/troyonink/2014/02/14/how-assets-hurt-college-aid-eligibility-on-fafsa-and-css-profile/

3

I don’t remember seeing this question – can anyone point out the section where this is asked?

Looking at the data summary of what I’ve already submitted, I don’t see any question where this is asked. Under “Parents’ Assets”, one of the questions asks for the total market value of parents’ investments and it lists Section 529 college savings plans but it doesn’t say all plans that name the student as a beneficiary.

Under student’s income section, it asks for any untaxed income received or expected to receive, which I assume is where you would include any 529 disbursements. But there is no question about 529 plans in this section.

Under student’s assets, there are questions about trusts of which they are a beneficiary but they don’t mention 529 plans (which are not trusts.)

4

I also don’t know where a grandparent-owned 529 account would be reported on Profile as an asset. A grandparent could change the beneficiary at any time to someone outside of the student’s immediate family, so I don’t see how any college can assume that such a resource is available in the future for the student. Of course, if a disbursement is made from the account for the student’s benefit, that would be reported as student income in the year that it was received.

Student-owned 529 accounts are reported in Profile item SA-110 (total current market value of student investments including Uniform Gifts to Minors).

5

I think someone need to call CSS again:

See http://talk.collegeconfidential.com/financial-aid-scholarships/1447604-grandparent-owned-529-p2.html Post #17

6

A student and/or parents may not necessarily know about a grandparent-owned 529 account that names the student as the beneficiary, and if they did know a grandparent account owner may not cooperate in disclosing the current value. Where are the instructions from CSS saying that such an account and its value need to be reported under section ES?

IF the grandparent account owner requests that the distributions go directly to the school, yes there will be a paper trail. But the grandparent has other options, including having the distribution made payable to the beneficiary, who will then (presumably) make payment to the school - no paper trail for the school to see.

7

One of the questions does ask whether contributions are expected from extended family members, etc. and since I had discussed this with my mother, I put in the number she’d indicated. I noticed that it shows up in the “Explanations/Special Circumstances” box even though I didn’t put it in there directly. I didn’t know that she had the funds in a 529 at the time but I’m also pretty sure there wasn’t a question or explicit instructions to list 529 plans held by someone else other than the parent.

8

The parents should know. Most 529 plans would ask for beneficiary’s SSN and most grandparents don’t know the grandkids’ SSN

9

We are in a similar situation. We gave all grandparents the SSN at birth for our ids as some people wanted to buy savings bonds, etc. My Mom did set up 529s for my kids but my brother has recently had kids and my Mom is retired now and not as able to contribute so she may split the plans she set up. It’s not a ton of money and I told her they wouldn’t need it until senior year so she has time to decide what to do but now am I supposed to disclose all of both accounts in my kids names even though the child that the CSS is for will at most receive 25%? I also have no access to statements and am not sure of the total just a ballpark idea. Ugh. Loving the FAFSA right about now. If they ask for verification I will have no way to verify this either makes no sense I have to include it. There should be a rule that if someone invests in your child’s SSN that you must get copies of statements!

10

I’m currently compiling my CSS worksheet. Looks like the value of 529 plans need to be reported in the Parent Assets section, Question PA-120A. According to the “Help Desk” instructions I printed out with the Worksheet:

“Include funds held in Section 529 prepaid tuition or college savings plans or Coverdell education savings accounts established for you and your brothers and sisters.”

So that stops me from shifting funds to one kid’s account for a school that doesn’t use the CSS, to make the kid who WILL go to a CSS school look better. Rats, I thought I’d figured out something clever.

Also, from Finaid.org:

“This loophole applies only to the FAFSA. The CSS/Financial Aid PROFILE form asks the family to list all 529 college savings plans that name the student as a beneficiary, regardless of whether the student is dependent or independent, so plans owned by a grandparent but with the student named as a beneficiary would have to be reported. (College savings plans that name a sibling as a beneficiary or which are owned by the student or the student’s parents are also reported on the PROFILE form.)”

http://www.finaid.org/savings/loophole.phtml

11

For FAFSA for dependent students:

-A 529 owned by the parent that names the parent, the student or a sibling of the student as beneficiary is reported as a parent asset. Distributions are not reported as income.

-A 529 owned by the student is reported as a parent asset. Distributions are not reported as income.

-A 529 owned by a sibling of the student is not reported.

-A 529 owned by any other person naming the student as the beneficiary is not reported as an asset, but distributions are reported as untaxed income to the student.

12

Supplemental question SQ-521 reads: “Enter the total value of assets held in Section 529 college savings plans that were established for the student by someone other than the student’s parent(s).”

SQ-522 is identical except it replaces the words “college savings” with “prepaid tuition”.

You wouldn’t see these supplemental questions on your CSS unless one of your schools asks them - they seem uncommon.

13

With the above in mind, does it make sense for the grandparent to plan to hold onto the 529 plan, in the grandparent’s own name as beneficiary, until after the student has been awarded the aid for his/her senior year? Then the grandparent decides to change the beneficiary to the grandchild.

Suppose the grandparent wishes to kick in say $40K in total - they presume $10 K per year for 4 years.

And suppose the QEE’s - that is, the cost of tuittion/fees/R&B to the student/parents will be $40K per year - that is, the COA was $65K but there was $25K in need based aid granted by the school.

If the grandparent had given the full $40K in cash directly to the student before the student applied for any aid, it would be a student asset and the need based aid would presumably be reduced by $40K.

If the grandparent had given the student $10K per year after aid applications have been filed, the need is reduced each year by $10k, so there would be $30K less in aid given by the school over the remaining 3 years.

If the grandparent waits until senior year to tell the student they had this account, the school knows nothing about this account, and the aid is maximized. The grandparent distributes $40K from the 529 Plan to pay senior year, and the student/parent pay nothing for senior year.

I suppose the risk involved here, of course, is that something happens to the grandparent and they need the asset for something else - health expenses, another grandchild, etc. How easy is it to change the beneficiary on the grandparent’s 529 plans?

What are the contribution limits to a 529 plan? As I recall, money goes in after tax, but all earnings are sheltered while they are in the account, and nothing is taxed if used for appropriate educational expenses - including tuition/fees/expenses and room and board.