The best way for grandparents to help pay for college

529 plans offer unique benefits for grandparents, including reducing estate tax exposure, being able to retain control of the assets throughout the life of the account, ease of management and flexibility.

Are 529 plans tax deductible for grandparents?

529 plan contributions are not deductible at the federal level, but over 30 states offer a tax deduction or credit for contributions. However, some states only allow the 529 plan account owner to claim the deduction. Grandparents need to check with their state’s rules and decide whether it makes sense to open their own account or contribute to a parent’s account.

How does a grandparent-owned 529 plan affect financial aid?

A grandparent-owned 529 plan will have no effect on a student’s financial aid eligibility – as long as the funds remain in the account. But if the grandparent provides any type of financial support to the student (including withdrawals from a 529 plan), the amount is reportable as student income on the FAFSA. As much as 50% of student income will be counted as available funds to pay for college, so $10,000 from a grandparent-owned 529 plan can reduce need-based aid eligibility by as much as $5,000.

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Grandparent articles

Workarounds for grandparent-owned 529 plans

If a 529 college savings plan is owned by a dependent student or the dependent student's parent, it has a minimal impact on the student's eligibility for need-based financial aid. But, if the 529 plan is owned by anybody else, such as a grandparent, aunt or uncle, it will hurt aid eligibility. There are, however, a few solutions that will address the potential harm.

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