Personal Finance

My generous parents want to help save an pay for my children's college - is it better for parents or grandparents to own the 529 plan?

Rich Duprey

Published: October 27, 2024 8:25 am

It is difficult enough financing the cost of a college education without having to trip over complex rules and regulations. 

That’s the situation one Reddit user finds himself in on the r/personalfinance subreddit. With a newborn child, Redditor MozzarellaStix wants to know if it would be better for he and his wife to start a 529 plan to finance their child’s education or should the grandparents do so.

His parents are insisting the plan be in their name since grandparent-owned 529 plans do not count against financial aid when completing the Free Application for Federal Student Aid (FAFSA) that all students wanting loans must fill out.

However, MozzarellaStix has read that any money used from an account owned by grandparents gets reported as student income, which can hurt financial aid even more.

Unfortunately, that’s the problem with such programs. They are initially set up to help solve a problem, but only create different ones because the rules implementing them are so confusing. It can create serious financial hardship if the wrong path is chosen and can force parents to go to extreme lengths to get their child through college. Fortunately, the situation has been simplified, though not completely so.

24/7 Wall St. Insights:

• Financial aid for a college education has resulted in a morass of complex rules and regulations that can seriously undermine a student’s ability to finance an education.
• 529 savings plans are an excellent way to pay for college, but whether parents or grandparents owned the account could hurt the total amount of aid a student received.
• The law’s complexity was lessened for the most part, but parents should still consult with tax professionals and financial planners to esnure the right path is taken.
• Also: Are you saving enough for college? See how you can find a qualified financial advisor today ^(Sponsored)

A confusing set of conditions

Because he and his wife are fairly well off, their child probably won’t qualify for much need-based aid anyway. As a result, it won’t matter if the parents or the grandparents own the 529 plan. For everyone else, though, there could have been repercussions.

In the past, if a 529 plan was owned by parents, it fell under their assets and the account could affect their child’s financial aid determination. The Redditor’s grandparents were right; it generally would have been better for them to own the account though it wasn’t necessarily so clear cut. For example, contributions made to a student from a grandparent-owned 529 plan were considered untaxed income to the student and that could have lessened the amount of aid granted, too.

Yet if the contributions were made in the last two years of school, it likely wouldn’t have impacted the financial aid granted at all. So parents could have a 529 plan set up for the first two years and the grandparents for the last two. It was complicated, but perhaps the best of a less than optimal system.

A better path forward

However, recent changes to the rules have simplified things a bit. Now it may be preferable for parents to own the account even though a contribution from a grandparent’s account are no longer considered untaxed student income. 

That’s because with fewer questions about support sources on the FAFSA, colleges will now have less information available about a student’s total financial situation. As a result, they may be more inclined to require students to complete the College Scholarship Service (CSS) Profile, which still includes the money in a grandparent’s 529 account in the equation.

As an alternative, grandparents can gift money to the student’s parent who can then set up a 529 plan. For tax purposes, contributions to a 529 savings plan account are considered gifts. For 2024, a person can gift up to $18,000 per person without having to pay any taxes on the gifts.

Key takeaways

It’s obvious even with the rule changes, the situation still isn’t straightforward. It’s why parents trying to make such decisions for their child’s education should consult with tax professionals and financial planners first.

Yet the subreddit’s responses to the Redditor also shows why you also shouldn’t rely upon the internet for advice. While a number of responses to MozzarellaStix question were correct, many also didn’t account for the new rule changes, so the advice was outdated.

In short, the government’s rules remain too complex and opaque for the average person. An unsuspecting parent could end up harming themselves and their child financially by choosing the wrong option.