Saving for college can be a significant financial challenge for many families. However, recent updates to the Free Application for Federal Student Aid (FAFSA) have introduced a new opportunity known as the “grandparent loophole.” This provision allows grandparents to contribute to a student’s college education without negatively impacting their financial aid eligibility. In this blog post, we will delve into the details of this new FAFSA rule and explore how it enhances the benefits of 529 plans, providing families with more flexibility in their college savings strategies.
Understanding the ‘Grandparent Loophole’
Traditionally, contributions made by grandparents to a student’s college education were considered untaxed student income, which could reduce the student’s eligibility for need-based financial aid. However, the revised FAFSA rules have eliminated this hurdle. Under the new regulations, student income eligibility is solely based on data from federal income tax returns. This means that cash support from grandparents, non-parents, friends, or relatives will no longer have a negative impact on financial aid eligibility.
The Advantages of 529 Plans
Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
529 plans have long been recognized as an effective way to save for college expenses. They offer several advantages, including:
- Tax Benefits: Contributions to 529 plans are not tax deductible on a federal level, but withdrawals used for qualified expenses—such as tuition, fees, books, and supplies—are tax-free. Some states also provide tax breaks for 529 plan contributions, amplifying the potential tax benefits.
- College Planning Flexibility: The ‘grandparent loophole’ now enables grandparents to directly contribute to a student’s 529 plan. This expanded flexibility allows families to tap into additional sources of funding, ultimately helping to cover a greater portion of college costs.
- Expanded Investment Options: Unlike traditional savings accounts, 529 plans allow contributions to be invested with exposure to stocks and bonds, providing the potential for growth over time. This growth potential may help as college costs continue to rise, allowing families to potentially accumulate a more substantial college savings fund. Investing involves risk including loss of principal.
- Transferability: If the beneficiary named in a 529 plan decides not to pursue higher
education or uses only a portion of the funds, the account owner can transfer the remaining balance to another eligible family member without tax penalties. This flexibility ensures that the funds saved in a 529 plan are not wasted.
The recent changes to the FAFSA rules have opened up an exciting opportunity for families seeking ways to boost their college savings with the ‘grandparent loophole’. By leveraging this provision, grandparents, non-parents, and other loved ones can contribute directly to a student’s 529 plan without affecting their eligibility for need-based financial aid. This newfound flexibility, coupled with the numerous benefits 529 plans already offer, helps ensure that families have greater control over their college savings strategy.
Need Help with Education Planning?
Understanding the intricacies of college savings can be overwhelming, but you don’t have to navigate it alone. At Keel Financial, our team of financial advisors is here to provide personalized guidance and support. Together, we’ll help you navigate the complexities of college savings and make confident choices that empower your family’s financial well-being. Remember, every family’s financial situation is unique, and it’s crucial to consult with professional advisors who have knowledge in college savings to help you and your specific needs. To learn more, contact us today.
Disclosures
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Winthrop Wealth, a Registered Investment Advisor . Keel Financial Partners and Winthrop Wealth are separate entities from LPL Financial.
