Congratulations in having some money set aside for college. Now let’s see how the FAFSA numbers played in with your daughter’s financial aid.
Here is the problem:
Your daughter is going to start college in fall of 2020, I assume. The FAFSA for the school year starting in Fall of 2020, ending in Spring of 2021 is what was used to calculate your DD’s family EFC. That FAFSA used 2018 income for her custodial parent and her. It also used assets as of the day she transmitted it.
As the noncustodial parent, the 528 you have for her was not in the picture. When you turn it over to her, it is my understanding that you will be giving her assets which should be reported as untaxed income for that year for HER.
That income will be reported on the FAFSA that she files. If you do this in 2020, she has to include that amount on her FAFSa that will affect her junior (3rd year ) of college. If she reports more than ~$6600 in income, that is assessed at 50%. The actual amounts in the 529s will show up immediately on the next FAFSA filed if you make the transfer in 2020 as assets but that is only assessed at about 6% so $20k in 529 money would only up the next FAFSA EFC by about $1200.
The 529s you have for your kids puts you into the same situation that grandparents are when they have 529s for their grandchildren. There is a lot in the Internet addressing that situation. Those options would apply to you and your children
A solution that grandparents use as a workaround is to gift money to the custodial parent as a conduit because money that does NOT appear in the FAFSA at all. If somehow you can transfer Money to a 529 in your Ex’s name that then immediately goes to payment to the school, you would avoid any FAFSA Reporting involvement Of those funds. I know you said you do not have a trusting relationship with your EX but perhaps you can work together on these once or twice a year transfers together pay your daughter’s college costs without affecting her financial aid.
The other solution that grandparents and you can use is to wait until her third year of college before transferring the 529 funds to her. On a 4 year college schedule, your daughter will enter her junior year in fall of 2022. The financial aid for that year will have been filed the year before or that year and it would use 2020 income which would not include that 529 transfer. That 529 transfer would occur in 2022 which not impact her college years income since her 4th year, senior year would use 2021 income and you are in 2022 at that time, though any money left on the actual date she filed that FAFSa would have to be included. Careful timing could preclude that even, though if counted, we are talking only 6% not the 50% that student income can be hit. For the first two years of college, loans would be necessary if there is a gap and in a case like this, Co-signing those amounts with intention of paying them with 529 seems just fine to me. Both you and your Daughter can use 529 funds up to $10k each to repay student loans. This way $10k in freshman and sophomore years loans each can be paid from the 529 with junior and senior year money coming direcrcy from 529 to the school.
You have this situation coming up again with your son. Remember that the income used for FAFSa is TWO years behind the fall school year that the student is matriculating. So if your son is expecting to start college fall of 2022, it’s this years income (2020) INCLUDING any transfer of 529 money that will be used on his FAFSA for that first year. You do NOT want him to get a 50% hit on those 529 amounts. If he is starting school after 2022 it might be wise to transfer 529 into his name so the financial impact is minimal (6% ) on FAFSA
Be aware that if you transfer 529 ownership to someone , you lose control of the use of the funds. 529s are strict ownership transfers, some may not permit them especially if state tax breaks are involved. Since YOU would have gotten tax breaks in putting away that 529 Money in some state’s, if the funds are used in a way other than school and loan use, YOU would be subject to very messy recapture rules. I’ve avoided reading those rules and simply made sure our 529 money has gone towards allowed expenses.
The merit award is a whole other subject. In many households, I’d a student loses merit money that is necessary to afford the school, that student has to find an affordable alternative, like commuting locally, going part time unless the college makes up that amount in financial aid. Unless a school guaranteed to meet full need, which few schools do, they rarely do other than with loans.