FAFSA Update is Good News for Grandparents Who Want to Help Pay for College
There’s good news ahead! When changes to the Free Application for Federal Student Aid (FAFSA) go into effect for the 2024-2025 school year, FAFSA forms will no longer require students to disclose cash support when they apply for financial aid.
The FAFSA changes mean that grandparent-owned 529 accounts, like South Carolina’s Future Scholar 529 College Savings Plan, will have no impact on a student’s eligibility to receive needs-based financial aid. That’s welcome news for grandparents who want to save to help pay for their grandchildren’s college education.
Say Goodbye to the ‘Financial Aid Trap’
Although 529 plans provide an extremely effective way to save for education related expenses, grandparent-owned 529 accounts have been subject to burdensome disclosure requirements on the FAFSA.
When applying for financial aid, students have been required to list distributions from grandparent-owned 529 accounts that were used for education expenses, disclosing them as income. Labeled the “financial-aid trap” by savingforcollege.com, this disclosure could “trap” students by negatively impacting their ability to receive needs-based aid.
Thankfully, families no longer need to worry about falling into the financial aid trap. The new FAFSA questionnaire for the 2024-2025 academic year does not require students to manually disclose cash support on the FAFSA form. Student income will now be taken from tax return data, allowing grandparents to contribute to meeting the cost of their grandchildren’s education without impacting any needs-based financial aid eligibility.
Why Grandparents Will Love Future Scholar
The Future Scholar 529 College Savings Plan will not only give grandparents a smart and easy way to help their grandchildren achieve higher education goals. It will also offer grandparents estate planning benefits on taxes and gifting, as well as on distributions.
The Internal Revenue Code includes the following incentives for 529 assets:
- Contributions to 529 plans are completed gifts and are removed from the contributor/owner’s taxable estate, but the owner maintains control.
- The forward-gifting provision permits contributions in the amount of five times the annual exclusion—$75,000 for individuals ($150,000 for joint filers)—to be made in a single year without gift tax. This provision is allowed for as many beneficiaries as the contributor desires.
- 529 accounts allow access to tax-deferral with no time, age, or income limits (and with no required minimum distribution for the owner or successor owner upon inheritance).
Future Scholar also offers flexibility as another major benefit for grandparents. For example, if the 529 beneficiary decides not to attend college, the account owner can easily change the beneficiary at any time.
Equally important is the account owner’s ability to transfer ownership. Grandparents can maintain control while the beneficiary is still years away from college, flexibility that can prove helpful in situations where grandparents unexpectedly need account assets for their own use.
The Bottom Line
South Carolina’s Future Scholar 529 College Savings Plan is a powerful college savings tool and the perfect vehicle for grandparents who want to take advantage of gift and estate tax benefits. New changes in the FAFSA mean grandparents considering investing in Future Scholar to help send their grandchildren to college won’t have to fear a financial-aid trap. Smart grandparents who open a Future Scholar account can simply enjoy its highly-regarded savings features while giving their grandchildren the important gift of higher education.