Grandparents Helping with College: A Word of Caution

Financial Aid, Saving Money

I often work with students who have a grandparent (or other relative) who has saved money in a 529 or other account to help pay for college. If you are one of these lucky students (or their parent), you are fortunate!

But it’s also important to know that grandparent’s money can harm your chances for financial aid. As long as the money remains safely in the grandparent’s account, it does not need to be reported on the FAFSA. While some colleges that require the CSS Profile will ask you to report the value, it is not part of the formulas used to determine your initial aid eligibility.

However, the tricky part is when the grandparent begins to withdraw the money from the account to help pay for college. This money is considered a gift to the student, and must be reported as student income in the following year’s financial aid application. Student income is assessed at 50%, which significantly reduces your aid eligibility.

Let’s say, for example, that grandma contributes $20,000 towards the cost of freshmen year tuition. When you file financial aid applications for sophomore year, you are expected to report that $20,000 as student income. Since student income is assessed at 50%, your financial aid eligibility for sophomore year is reduced by $10,000!

It’s worth noting that if your family’s Expected Family Contribution is already higher than Cost of Attendance, none of this will matter, because you won’t qualify for need-based aid regardless. But for families that DO potentially qualify for any amount of need-base aid, it’s worthwhile to be careful about using grandparent money for college.

If it’s financially feasible, my recommendation is for grandparents to wait until the student’s final year of college to gift the money – at this point, no more financial aid applications need to be filed.

Another option is for the grandparent to transfer ownership of the account to the parent. It will still be reported as a parent asset on financial aid applications, but parent assets are assessed at a maximum of 5.64%. In my example, the $20,000 would reduce aid eligibility by just $1,128. That’s a big difference!

Interested in learning more about YOUR financial aid eligibility? Our consultants can help families understands college costs and maximize their chances for financial aid. Visit our Services page to learn more.