The unintentional impact of non parent-owned 529s

Money Matters

By Lauren N. Mundy, CRPC® Vice President, Lions Bridge Financial Advisors

Planning for college can be a stressful, complex process for many families. 529 plans are a tool offering many benefits, but with the cost of college outpacing inflation, families often need to seek other sources to help offset those costs such as Free Application for Federal Student Aid (FAFSA), scholarships, grants, etc. One of the strategies parents believe will help with the FAFSA process is having a non parent (e.g., a grandparent) open a 529 for the benefit of his or her child to “hide” the asset. However, what might not be realized is FAFSA looks at two components while determining aid eligibility: assets and income, each of which has a different impact.

Under current law, any parental assets will reduce a student’s aid eligibility by 5.64 percent. For example, if a parent-owned 529 has a balance of $100,000, then $5,640 will be counted as an asset and reduced from aid. Distributions from parent-owned 529s will not impact income as long as the distributions are used for qualified education expenses at an eligible education institution.*

Non parent-owned 529 plans have an impact on income. Distributions from these plans will count as untaxed income to the student on FAFSA, even if used for qualified education expenses. Student income will reduce aid eligibility by 50 percent, versus the 5.64 percent mentioned above. For example, if a grandparent takes a distribution of $20,000 from the 529 for college costs, the student’s aid eligibility will be reduced by $10,000.

If your child is the beneficiary of a non parent-owned 529, please keep the below strategies in mind to reduce its impact on FAFSA:

  1. Defer distributions from the 529 until January 1st of the student’s sophomore year, after the second-to-last FAFSA is filed (if on a four-year graduation plan). Distributions after that date will have no impact on aid eligibility. If the student is on a five-year graduation plan, defer distributions until January 1st of the student’s junior year.
  2. Check with the 529-plan provider to determine if ownership change is allowed. If so, change the owner to one of the child’s parents. The 529 will then count as a parental asset and impact aid by a reduced amount of 5.64 percent. Please note it is important to check with a tax professional before changing an ownership and verifying there will be no tax ramifications.
  3. Rollover 529 plan funds from non parent-owned 529 into parent-owned 529 on an annual basis. Timing is key when using this strategy and it is important to consult a professional before pursuing.

Yes, planning for college can be both stressful and overwhelming; however, there are plenty of tools and resources available to help with the process. Visit your financial planner to learn more about college savings strategies and how to navigate the process.

*Visit to view qualified education expenses and the list of eligible education institutions.

Lauren N. Mundy, CRPC® is vice president with Lions Bridge Financial Advisors and can be reached at 757-599-9111 or by email at Website:

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