PriyaPatelTLDR:
– The new FAFSA form eliminates questions about grandparent contributions, creating a loophole for grandparents to fund college without impacting financial aid
– Middle-income families who have the capacity to save will benefit the most from this loophole
In the new FAFSA form for the 2024-25 academic year, a loophole has been discovered for grandparents to fund their grandchild’s college education without affecting their financial aid eligibility. This “loophole” arises from the streamlined nature of the new form, which no longer requires students to report contributions from grandparents. Middle-income families who have the ability to save will benefit the most from this new opportunity.
The simplified FAFSA form now uses a new calculation called the “Student Aid Index” to estimate how much a family can afford to pay for college. Previously, assets held in grandparent-owned 529 college savings plans were not reported on the form, but distributions counted as untaxed student income. This could lead to a reduction in aid of up to half of that income. The new formula pulls federal tax information directly from the IRS and reduces the number of questions on the form, making it more beneficial for middle-income families.
Financial advisors recommend opening a 529 plan for grandchildren to help pay for college, as this can now be done without negatively affecting financial aid eligibility. However, it is important to consider the implications of giving control of the account to someone else, such as its impact on Medicaid eligibility. Despite this “loophole,” colleges may still take grandparent contributions into account for nonfederal institutional aid.
529 plans are already seen as the best way to save for college, and recent changes have expanded their use to include various educational expenses. Families can also now roll unused 529 plan funds over to Roth individual retirement accounts without penalty. Overall, this loophole in the new FAFSA is seen as a positive step towards encouraging families to save more for college education.
