Hi there, fellow planners and proud grandparents! We all know that post-secondary education costs are sky-high, so it’s no surprise that many of us want to chip in and help our grandkids with these hefty expenses. Luckily, the recent changes to the 2024-25 Free Application for Federal Student Aid (FAFSA) have introduced a new “grandparent loop” that makes this a bit easier.
According to the College Board, the 2023-24 average annual cost of tuition and fees for a full-time undergraduate student in a four-year program ranged from $11,260 for a public in-state institution to $41,540 for a private non-profit institution. Even though these tuition fees rose by less than the rate of inflation, they still went up by 2.5% and 4.0%, respectively.
But tuition isn’t the only expense! On average, housing and food cost $12,770 annually for a four-year public in-state program and $14,650 for a private non-profit program. And let’s not forget about the cost of books, software, and hardware, all of which have been hit hard by inflation.
How a 529 Savings Account Can Help
Enter the 529 savings account—a fantastic tool designed to help families save for a child’s education. This tax-advantaged account is typically opened by a parent or grandparent with the child as the beneficiary.
Contributions are considered gifts, with an exemption from the IRS gift tax of $18,000 per year for individuals and $36,000 for married couples. The money grows tax-deferred, and some states even offer tax deductions on contributions. Withdrawals for qualified education expenses, as defined by the IRS, are not subject to state or federal taxes.
Qualified expenses include tuition, mandatory fees, room and board, books, and other school-related costs. These funds can be used for tuition at any U.S. college or university, as well as some international institutions.
Despite saving diligently, many students still need financial aid. For instance, in 2022-23, the average aid per full-time undergraduate student was $15,480, according to the College Board. Moreover, the Education Data Initiative reports that the average federal student loan borrower has $37,088 in outstanding debt.
The ‘Grandparent Loophole’
To apply for student aid—including grants, scholarships, and loans—from over 6,400 U.S. colleges and universities, you need to fill out the FAFSA. This form collects demographic and income information and lets you list up to 10 schools you’d like to attend. Successful applicants will hear back directly from these schools.
Here’s where the “grandparent loophole” comes in. Starting with the 2024-25 FAFSA, an applicant’s total income will be calculated directly from the IRS Data Retrieval Tool (DRT), based solely on their federal income tax return. This change means that cash support, like disbursements from a grandparent’s 529, won’t impact financial aid eligibility.
Previously, distributions from a grandparent-owned 529 plan had to be reported as untaxed student income, potentially reducing financial aid eligibility by up to 50% of the withdrawal amount. Now, grandparents (and other family members or friends) can gift money to a student without affecting their financial aid eligibility.
Maximizing the Benefits of a 529
To get the most out of a 529, open the account as early as possible to give your investments more time to grow. You can also opt to gift five years’ worth of contributions ($90,000 for an individual and $180,000 for a couple) in one lump sum without incurring the gift tax.
Consulting a financial/retirement advisor can help you optimize your investment portfolio. Additionally, consider moving to a more conservative portfolio before you start withdrawals to preserve your gains and ensure the funds last.
However, ensure that withdrawals from the 529 plan are used only for qualified expenses to avoid hefty tax penalties on non-qualified expenses.
With these new FAFSA changes and the benefits of a 529 account, helping your grandkids with their college expenses has never been more strategic. Let’s set them up for success and make those college dreams a reality! Reach out to us at Her Retirement if you need some help with 529s or other financial planning needs at: retire@herretirement.com.