Articles from The Mediator
College Savings: Grandparents’ Trap?
529 college savings accounts are a popular ways to save for college — and for good reason. Once funds are deposited to a 529 account, they are never taxed again, if they are used for specific educational purposes such as tuition, mandatory fees, and some room and board costs. Some states also offer tax deductions for contributions, though the IRS doesn’t.
Grandparents have figured out that 529s are a great way to help with their grandchildrens’ college costs. But this may cause problems for students receiving need-based financial aid.
This is because distributions from grandparents’ 529s count as student income under the financial aid formula. So students who use this money (and then show this income) could see their assistance decrease the following year.
A way around this problem is for grandparents to instead contribute to a parent-owned 529, which impacts need-based financial aid to a much lesser extent. Of course, doing this means that grandparents might not be able to control how the money is invested, and later used.