<p>My mother (my son's grandmother) has created a 529 for my son, and she and some other people have been contributing to it regularly. If contributions continue it will have a pretty generous amount of money by the time he gets to college, and I imagine it will be his primary resource for paying for school, although I'll certainly be able to contribute as well.</p>
<p>My son is the only person who could likely use this fund. I know you can transfer it to other family members, but we don't have anyone who would fit the criteria.</p>
<p>Anyway, to be honest, since I didn't set it up and don't contribute to it, I don't know much about it, but reading some questions here has made me wonder.</p>
<p>1) Exactly what expenses can this be used for? My guess is that when it's time for college, he'll have a little more than the COA for 4 years at our state flagship, living on campus. But of course, some of the COA is things like books, and food, and travel to and from campus. Could he use it for those things? Could he use it for study abroad or living on campus to do summer research? Or is it strictly tuition?</p>
<p>2) What happens if he gets merit aid? I thought I read somewhere that he could withdraw the amount of an earned scholarship. Is that right? Can he withdraw the amount of need based aid?</p>
<p>3) What if he has money left over?</p>
<p>4) What if he doesn't go to college at all?</p>
<p>5) I think the money is in his name, but I'm not sure. Should it be? If not, is it too late to change it? If we do put it in Grandma's name even though he's the only possible beneficiary, is that ethical?</p>
<p>1) A 529 account can be used for anything that your heart desires. The one catch is that if you use it for something that isn’t a qualified expense you will be hit with a 10% penalty fee and federal taxation (state and local, maybe but im not sure). So if you are asking “what can I use it for without being hit by taxes and penalties”, then it is any qualified expense in the COA of the college which includes room, board, books, supplies, travel expenses and tuition. </p>
<p>2) I think I read this same thing, but this goes along with “You can’t take out more than the COA of the college in a given school year”. So, if the COA is 60k, you get a 30k scholarship but you can still take out 60k (the COA). I am not 100 percent sure about this, though.</p>
<p>3) If he has money left other he can either use it by being dinged by the 10% penalty + taxes or he can use it for graduate school.</p>
<p>4) Same situation as above.</p>
<p>5) This is called the grandparents loophole. For FAFSA purposes, you do not have to include the account since the custodian is not you or your husband. It is possible that the CSS PROFILE might ask you information about non-custodial 529 accounts, in which case you have to report it. Your son is only the beneficiary, so it isn’t “his”, technically.</p>
<p>What about need based financial aid? If my son gets some need based aid, can he still withdraw up to the COA? </p>
<p>Also, because I’m curious even though this won’t apply to my son who has asthma, but what if you go to a Military School, where the COA is $0 or close?</p>
<p>It appears from the 529 website that if my son goes to a school that has a COA of $50,000 but gets $40,000 in “scholarship”, he can still withdraw $50,000 without penalty. I’m wondering if that applies to need based aid too. If my kid goes to a need met school, and the 529 isn’t figured into his aid because of the grandparent loophole, his EFC would likely be significantly less than 1/4 of the 529, or so the NPC’s tell me. In that circumstance, can he withdraw up to the COA? Or does the word “scholarship” mean merit only?</p>
<p>I hope our resident 529/FA experts will help if I fumble this, it’s my interpretation of what the govt. link says [full disclosure: I have 529s but haven’t used them yet].</p>
<p>I assume that this is the part of the link that you are referring to:</p>
<p>
</p>
<p>This includes both merit scholarships and need based FA.</p>
<p>However, for your example, I don’t think that you would be able to withdraw the full 50k from the 529 without the penalty on part of it.</p>
<p>Your child gets 40k in free aid (merit scholarship and/or need based FA grant). The part of this that is non-taxable is 36k; 4k is taxable as it is above the cost of tuition, fees & books.</p>
<p>Since incidentals and travel are not included as qualified expenses for 529s, the adjusted qualified educational expense is the 10k for R&B that is paid partially with taxable scholarship/grant money (4k) and and partially by the family (6k). So you could use 10k in 529 funds without penalty. I think this is pretty much what they show in Example 1. under the part I cited.</p>
<p>Again, if I’ve bungled this, please correct me. I want to be sure I’ve got this right too!</p>
<p>Your confusion is on “need based aid”. Need based aid can be in various forms including loans, work study, grants, scholarship etc. A grant or scholarship are all considered the same, so if he gets money he does not have to to pay back, it is the equivalent of scholarship. If his package has a loan, then you can dip into the 529 instead of taking loan. However this is simplistic as schools make take in to account the fact that you have 529 plan.</p>
<p>In your case, for FAFSA you do not have to show it the 529 in the first year as grandama owns it. However, in the second year any withdrawals from the 529 plan will count as untaxed student income and will reduce aid in the second year. So the grandma loophole has a negative consequence in the second year.</p>
<p>But if you son is going to “meet needs” school, it is most probably a CSS/profile school (most FAFSA schools do not meet need) so you may have to declare the 529 anyway and the whole point is moot.</p>