If the student's grandmother uses $20,000 from her 529 account this year to pay for the grandchild's education, the distribution from that grandparent-owned 529 plan will be considered the girl's income. (The same is true for a distribution from any 529 plan owned by a third party and not reported as an asset on the FAFSA form.) It will be reported on the next year's FAFSA form as student income, which reduces financial aid eligibility by nearly 50%, or $10,000 in this case.
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