For an increasing number of families, financial aid plays a crucial role in affording college expenses. However, students are required to complete the Free Application for Federal Student Aid (FAFSA) to access most forms of assistance. Unfortunately, the new 2024-25 form has encountered numerous issues.
There’s a silver lining for families who have been saving, though. As part of the FAFSA simplification process, students no longer need to disclose contributions from grandparents. This effectively creates a “loophole” for grandparents to contribute to their grandchild’s college fund without affecting their financial aid eligibility.
The simplified FAFSA form now utilizes a new calculation known as the “Student Aid Index” to estimate a family’s affordability for college expenses. Previously, factors such as household size, number of children in college, and various income sources influenced aid amounts.
Under the old rules, assets held in grandparent-owned 529 college savings plans weren’t reported on the form, but distributions from these accounts counted as untaxed student income, potentially reducing aid by up to half of that income.
The new formula pulls federal tax information directly from the IRS and reduces the number of questions from 108 to less than 50. Middle-income families, particularly those who can save, stand to benefit the most from this change.
Without questions about other income sources, middle-income families with the capacity to save will benefit the most. Financial advisor Michael Green suggests that families consider opening a 529 plan for their grandchildren to aid in college funding, especially now that it’s less likely to affect aid eligibility.
However, there are considerations to bear in mind. Ownership and control of the account rest with the grandparent, and the funds may be considered assets for Medicaid eligibility. Financial aid consultant Kalman Chany notes that despite this change, colleges may still consider grandparent contributions in awarding nonfederal institutional aid through the CSS profile.
529 plans are already widely regarded as the best way to save for college. Recent expansions have allowed funds to be used for continuing education, apprenticeship programs, and even student loan payments. Additionally, families can now roll unused funds from 529 plans into Roth individual retirement accounts without facing income tax or penalties.
Overall, any measures that encourage families to save more for college are seen as beneficial. Mark Kantrowitz emphasizes that expanding the capabilities of 529 plans and providing more shelter for them is a positive step.
