In my last post, I explained that financial aid officers will treat assets owned by the parent and the child differently for the purposes of calculating a family’s “expected contribution.” Now let’s consider savings set aside for Junior’s college by his grandparents.
The financial aid officers will ignore them.
Yes, you read that right.
But here’s the catch. Colleges look back at the two prior years of income when calculating aid for the next year. If the grandparents take a $10,000 distribution from the 529 they’ve created for Junior in his freshman year, that $10,000 will be considered income to Junior in that year and a college will assess that income at 50% his second year. When determining financial aid for Junior’s sophomore year, your family’s expected family contribution will then go up by $5,000.
You don’t want that to happen. So here’s what you do. Wait to use 529 plan savings from the grandparents until the last year or two of Junior’s college, to minimize the impact on your family’s expected contribution.