Financial advisors shouldn’t neglect financial aid planning for clients concerned about the cost of higher education, even if those clients have ample incomes.
With the average total cost at private universities now topping $40,000 a year, according to the College Board, financial aid is increasingly available to high-income families. Harvard’s director of financial aid, for instance, has reported that the college has 600 families with incomes over $180,000 receiving grant aid, mainly because multiple children are enrolled at expensive schools.
One possible aid planning tactic is to ask grandparents to fund 529 plans, with a college-bound grandchild as the beneficiary. “If someone other than the parent or student owns the account, the asset doesn't need to be reported on the FAFSA [Free Application for Federal Student Aid],” says Deborah Fox of Fox Financial Planning Network in San Diego.
The fewer assets a student’s family reports, the lower its expected family contribution (EFC) to college costs; the lower the EFC, the more aid a student might receive. Thus, holding a 529 account in a grandparent’s name can result in more college aid than holding that same account in a parent’s name.
There is a catch, though, according to Fox, who also heads Fox College Funding. “If 529 withdrawals are made when a grandparent or other non-family member owns the account, the withdrawals will be counted as a student ‘resource,’” she says. “This translates into a substantial reduction in the student's financial aid award.”
What tactics can prevent such a reduction in aid? One option is to change the ownership of the account from the grandparent to one of the student’s parents. “Most state plans will allow this,” says Fox. “Then the 529 withdrawals won't count against the family.” A parent-owned 529 plan is assessed at no more than 5.64%, for the EFC calculation, so a $50,000 account held by a parent could reduce aid by $2,820.
The financial aid impact of counting the 529 account as a parent’s asset may be much less than the result of paying college bills from a grandparent’s 529 plan, but there still could be some effect. Such a change in account ownership, moreover, might generate a recapture of any state tax benefits the grandparent had claimed.
“Another strategy,” says Fox, “is to not make withdrawals from the grandparent’s 529 account until after the last financial aid form for the senior year is filled out, during the winter of the student’s junior year. At that point, any withdrawal from this account won't affect the financial aid award.”
If a student's grandparent waits to start 529 withdrawals, though, advisors may want to suggest subsequently emptying the account to pay remaining college bills, in order to maintain the tax-free treatment of those distributions.