It’s always appreciated when grandparents or other relatives can help with college costs. However, they need to be careful about how they go about pitching-in especially if their grandchildren have a shot at receiving need-based financial aid. Merit scholarships are not affected by grandparent contributions.
It is important to note that the tips below on how relatives can help without affecting need-based financial aid are slated to change for FAFSA-only schools with the FAFSA Simplification Act that will take effect with the 2024-2025 school year. It has not yet been determined if CSS Profile schools will change their methodology. For a list of those schools click here: https://profile.collegeboard.org/profile/ppi/participatingInstitutions
Relatives or family friends can save for a child’s college costs without jeopardizing the child’s chances for need-based financial aid as long as the money stays in the 529 or other investment accounts. For example, a grandparent can open and fund a 529 intended for their grandchild’s college costs at any time. The FAFSA does not inquire about third parties saving for a child’s college education. The CSS Profile rarely asks about non-parent money for a student; however, it will ask you to “Enter the total amount you expect to receive from your relatives and all other sources” for the school year that you are completing it for. If you expect someone, other than yourself, to gift money to be used specifically for college costs that year, you will have to declare it here.
The complication is in the withdrawal of those savings. When grandparents eventually withdraw money from a 529 or other investment account to give to their grandchild for their education costs, parents are supposed to report this as the child’s untaxed income on the FAFSA and CSS Profile. This income can reduce aid eligibility by as much as half of the cash withdrawn.
Ideally, grandparents will want to be strategic when withdrawing money to help defray college costs. If financial aid is at stake, grandparents could safely start helping with college costs in the second semester of the sophomore year after the family has filed for financial aid for the upcoming junior year since the FAFSA uses “prior-prior” year income; for example, if a child was starting college in 2020, grandparents should wait until 2022 to begin gifting to the grandchild.
Grandparents can also simply give their adult children a cash gift, but this strategy is only recommended if applying to FAFSA-only schools and is also recommended to happen only after the FAFSA is filed. Unfortunately, the CSS Profile asks about the amount of cash a parent received and any money paid on their behalf such as bills for the year it is completed.
If grandparents and parents have a 529 plan administered by the same state, a grandparent may be able to rollover a portion of their 529 plan into the parent-owned 529 after the FAFSA is completed; this way, if the rollover is used up before the next FAFSA is filed, it would not be reported on the following FAFSA.
As stated, the FAFSA Simplification Act changes the viability of these strategies. For a more customized discussion of your specific situation, please use the below link to schedule a free consultation: