Paying for college with grandparents 529

[Anonymous]

We had a financial advisor* tell us that when we use our parents funds for our child's college, that we should open our own 529 with a small amount and then each time a bill is due, transfer only that amount of money from the grandparent's 529 to our 529, and then pay it immediately to the school. I don't understand why this is. I know the 529 owned by the grandparent isn't used when calculating the FAFSA expected financial contribution by the student's family. However, I saw that when it's used for tuition, it's counted as student income that they have to report, which affects the FAFSA the following year. The advice I read online is that it's better to transfer the grandparent's 529 to the parents once the kid is about to start college, so that even though it counts when calculating the FAFSA, it doesn't have as big an impact as counting the grandparent-paid tuition as income.

Is that what I should do? Or should I do the business of transferring from the grandparent's account to mine only what we need for the current bill, and then paying it right away? (This seems a little like money-laundering of some kind...)


*a person who advises people on how to pay for college, not an official financial advisor
and yes, I realize I should go back and ask this advisor to clarify, but I'm not able to reach him.

[Anonymous]

What are you trying to avoid or trying to get with all these unnecessary transfers?

[Anonymous]

Anonymous wrote:What are you trying to avoid or trying to get with all these unnecessary transfers?

* Our income is too high to get any need-based aid anywhere but the more expensive schools, in that our expected family contribution is $50K-ish. But it is ONLY that aid that would make it possible for one of our kids to attend an elite school. Because we don't have enough money to pay anything more than that (even with the grandparent's' 529.)

* From what I read, if grandparent pays tuition through their 529, it will count as the student's income. The student will need to file taxes, and then we may not qualify for any aid the following year, because a higher percentage of the student's income is counted toward the expected contribution.

* I think if we pay from a 529 of our own it won't count as student income?


Do I have this correct? We really can't pay more than our current expected contribution.

[Anonymous]

It’s not income if it is used to pay for qualified education expenses. Just bc your expected family contribution is $50,000, doesn’t mean that the school will give you $30,000 of aid. I’m caveating my earlier statement that there may be a difference between what FAFSA considers income and what the IRS considers income bc I haven’t completed FAFSA. We use a grandparent 529 to pay tuition and a portion of her living expenses based on what the school allows. My dd is now in an apartment so we pay the rest out of pocket.

[Anonymous]

Anonymous wrote:

Anonymous wrote:What are you trying to avoid or trying to get with all these unnecessary transfers?

* Our income is too high to get any need-based aid anywhere but the more expensive schools, in that our expected family contribution is $50K-ish. But it is ONLY that aid that would make it possible for one of our kids to attend an elite school. Because we don't have enough money to pay anything more than that (even with the grandparent's' 529.)

* From what I read, if grandparent pays tuition through their 529, it will count as the student's income. The student will need to file taxes, and then we may not qualify for any aid the following year, because a higher percentage of the student's income is counted toward the expected contribution.

* I think if we pay from a 529 of our own it won't count as student income?


Do I have this correct? We really can't pay more than our current expected contribution.

Keep in mind that only elite private universities that are nearly impossible to get into give any substantial grant need-based financial aid.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:What are you trying to avoid or trying to get with all these unnecessary transfers?

* Our income is too high to get any need-based aid anywhere but the more expensive schools, in that our expected family contribution is $50K-ish. But it is ONLY that aid that would make it possible for one of our kids to attend an elite school. Because we don't have enough money to pay anything more than that (even with the grandparent's' 529.)

* From what I read, if grandparent pays tuition through their 529, it will count as the student's income. The student will need to file taxes, and then we may not qualify for any aid the following year, because a higher percentage of the student's income is counted toward the expected contribution.

* I think if we pay from a 529 of our own it won't count as student income?


Do I have this correct? We really can't pay more than our current expected contribution.

Keep in mind that only elite private universities that are nearly impossible to get into give any substantial grant need-based financial aid.

Yes, my DC totally had the stats for one of these schools, but didn't get accepted. When we used the calculators on the schools' websites, our expected contribution varied between 41K and 52K, but these are schools whose full cost is $77 K so it makes a big difference. So while our first DC wasn't accepted, and if she stays at state school, this won't be an issue. But we have two more kids coming who might get into an elite school, or our first might transfer. I want to leave the option open, if possible.

[Anonymous]

Anonymous wrote:It’s not income if it is used to pay for qualified education expenses. Just bc your expected family contribution is $50,000, doesn’t mean that the school will give you $30,000 of aid. I’m caveating my earlier statement that there may be a difference between what FAFSA considers income and what the IRS considers income bc I haven’t completed FAFSA. We use a grandparent 529 to pay tuition and a portion of her living expenses based on what the school allows. My dd is now in an apartment so we pay the rest out of pocket.

We used the calculators on the websites of the schools our kid was applying to, to learn what need-based aid we might expect.

So, when you paid tuition for your DD with the grandparent's 529, she didn't have to file taxes on it?
That's helpful. Though as you say, she might have needed to report it on the FAFSA if you'd done one.