Grandparents often want to help with their grandchildren’s college tuition bills. But you should be very careful about using a 529 plan for these expenses.
The reason? College financial aid programs generally don’t consider parents’ contributions from a 529 plan as student income, but they typically do consider grandparent 529 contributions as income. As a result, these contributions could reduce a student’s eligibility for grants, subsidized loans, and work-study programs.
Only 11% of grandparents are aware of this problem, according to a recent study by Fidelity.
If a student expects to be eligible for financial aid, in many cases it might be preferable for grandparents simply to give money directly to the parents in order to help out – even though this means forfeiting the tax-sheltered advantages of a 529 plan. Grandparents can also contribute to the parents’ own 529 plan, although not all states allow a tax benefit for doing so. [Read more…]