It’s the most wonderful time of year again! Well, maybe not the “most” wonderful but it is the time of year when students are out of school, eagerly anticipating all the fun the summertime has to offer while many parents are eagerly awaiting… well, the next school year. If higher education is on the horizon for your kids or grandkids, you may have already started planning and saving. If so, you may want to consider a 529 higher education savings plan.

What is a 529 Plan?

A 529 plan is an education savings plan usually operated by a state and is designed to help families save money for college or other higher education. 529 plans usually carry with them several unique benefits. Generally, earnings in a 529 plan grow federally tax-deferred and may become completely tax-free if the funds are used for qualified higher education expenses.  Also, contributions may be deductible at the state level depending on the state you live in. Everyone is eligible to contribute to a 529 plan and there are no income restrictions.  As the donor to the plan, you are the owner of the account and you maintain control of the funds for the life of the plan. Additionally, there may be estate planning benefits to consider when using a 529 plan.

Who Can Own a 529?

Anyone can own a 529 higher education savings plan and anyone can be the beneficiary of that plan. As the owner of the plan, you have the ability to direct the investments and choose (or change) the beneficiary. Most commonly, parents are the owners of the 529 plan and their children are the beneficiaries. It is also fairly common for grandparents to own a 529 plan for the benefit of their grandchildren. A 529 plan is a great option to save money contributed from grandparents for the benefit of their grandchildren, it just might make more sense for the parents to own the plan.  

Let me explain:

When it comes time to apply for college and thereby, apply for financial aid, each family will complete the FAFSA (Free Application for Federal Student Aid) form. One of the elements of the financial aid process is something called the EFC (Expected Family Contribution). This is a calculation that will determine how much your family is expected to contribute to the COA (Cost of Attendance) out of pocket. If the cost of attendance exceeds that number, you may be eligible for a number of Federal financial aid programs. Part of the calculation for EFC considers the student’s income and assets and the parent’s income and assets. The EFC worksheet helps determine what portions of all of those dollars are required to be used before becoming eligible for financial aid.  

That being the case, on the surface, it seems like it would make sense for the grandparents to own a 529 plan for their grandchildren’s benefit because it doesn’t count towards the student’s nor the parent’s income or assets. The downside is that once the funds come out of the grandparent-owned 529 plan, they are considered the student’s income on the FAFSA form two years after they are received.  Since it counts as income for the student, the dollars are weighted almost four times as heavily as they would be if they were part of the parent’s assets in the calculation for financial aid eligibility. In simple terms, parent’s income and assets will count against you a little bit of financial aid eligibility, student income and assets will count against you a lot!

One more note.  If you are a grandparent and currently own a 529 plan for one or more of your grandchildren, you may want to consider the following.  Since any income a student receives as a distribution from your 529 plan is considered in the financial aid calculation two years later, you may want to defer taking money out of the account until the student is a Junior at a 4-year school.  The reason is that if they take income as a Junior, it would not count against them until they file their FAFSA for their 5th year of college.  If they don’t attend the 5th year of college and therefore don’t need to fill out an FAFSA, the income won’t count against them!

So, grandparents, it’s great that you want to contribute to the cost of your grandchildren’s higher education. The best idea just might be to gift your contribution to your adult son or daughter and let them contribute to the 529 plan. They may even be able to claim a state tax deduction!


It should be noted, the claims I have made above are based on a hypothetical set of income and asset information that I deem to be that of a typical working family. There are many assumptions (income, assets, tax bracket etc.), too numerous to include here, that support my conclusion. Under certain circumstances, it could make sense for the grandparent to own the 529 plan. This article should not be considered a replacement for completing the FAFSA and the EFC worksheet with your guidance counselor, financial aid officer, accountant and/or financial advisor. If you are interested in learning more about 529 plans and how it may benefit you and your situation please contact me for a one-on-one meeting.

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