Understanding the New FAFSA Changes: Impact on Grandparents' Contributions to College Education
In a significant shift that could reshape many families' college financing strategies, recent amendments to the Free Application for Federal Student Aid (FAFSA) have altered the way grandparents' contributions to their grandchildren's education are treated.
By SAGE Scholars — March 14, 2024
In a significant shift that could reshape many families' college financing strategies, recent amendments to the Free Application for Federal Student Aid (FAFSA) have altered the way grandparents' contributions to their grandchildren's education are treated. Historically, money from a non-parent 529 account could be counted against a student's eligibility for need-based financial aid, potentially reducing the amount of aid a student could receive. The new changes, however, aim to address this issue by no longer taking these contributions into account.
Before the change, financial assistance from grandparents and other relatives was considered untaxed income when students reported it on their FAFSA forms. This categorization could reduce aid eligibility by up to 50% of the amount of the assistance - a significant penalty. Essentially, generous gifts from grandparents could decrease the amount of federal aid for which students qualified, placing an additional financial burden on families seeking to minimize their out-of-pocket expenses for college.
The recent overhaul aims to make the financial aid process more equitable and reflective of a student's true financial need. Under the new FAFSA guidelines, money contributed by grandparents for a grandchild's education will not be factored into the calculation of a student's financial aid eligibility. This shift is part of a broader effort to simplify the financial aid application process and make higher education more accessible to students from all financial backgrounds. Be aware however, that at over 200 private institutions that use the CSS Profile for awarding their financial aid, grandparent held 529 plans will still be considered.
Implications for Families
Benefits:
- Increased Financial Aid: For many students, the new policy could result in higher eligibility for need-based financial aid, including grants and subsidized loans. By not penalizing families for external support, the FAFSA is enabling a more accurate representation of a student's financial need.
- Encouragement for Family Support: Grandparents and other relatives may be more inclined to contribute to a student's education, knowing that their assistance won't negatively impact federal aid eligibility. This change can foster a more collaborative family approach to funding higher education.
Other Financial Aid Strategies for Grandparents
- Superfunding. The IRS allows anyone to gift up to $75,000 (or $150,000 if filing jointly) to a 529 gift tax-free. The only stipulation is that you must elect the five-year gift rule on your IRS 709 form (gift tax return). Note that the gift is removed from your taxable estate if you live all five years.
- Paying the college directly. If a grandparent were to give $20,000 to a grandchild for schooling, the IRS would consider that a gift in excess of its $15,000 annual gift limit. However, it makes an exception for tuition payments: Under the Gift Tax Education Exclusion for Tuition, any money gifted to a family member to pay for college tuition is not subject to the federal gift tax, so long the tuition payment is made directly to the student's school. One downside of this is colleges often reduce institutional financial aid packages by the amount of the gift.
- Incentivizing. For some families, it's important to have their student be financially invested in their education as a way to keep them motivated. You could decide to start your own match program, where for every dollar your grandchild contributes, you contribute $2.
- Waiting until after graduation. If your grandchild is planning on taking out student loans to pay for their education, you might consider choosing to help them pay off their debt post-graduation. This way there is no impact on your grandchild's eligibility for financial aid, and they can deduct loan interest of up to $2,500 on their tax return. Refer to IRS Publication 970 for more information on tax benefits for education.
With these changes in place, it's essential for families to revisit their college financing plans. Consulting with a financial advisor who understands the nuances of college funding and financial aid can help families make informed decisions. Moreover, families should explore all avenues of financial aid, including scholarships, grants, and work-study programs, to complement family contributions and minimize reliance on student loans.
Conclusion
The FAFSA's recent changes mark a significant step towards making college more accessible and affordable. By removing barriers that once penalized students for receiving financial support from grandparents, the federal government is acknowledging the vital role that family contributions can play in funding higher education. However, with these changes comes the responsibility for families to stay informed and adapt their college financing strategies accordingly. Ultimately, this policy adjustment opens new doors for students to achieve their educational aspirations with greater financial support from their loved ones, free from the fear of reduced aid eligibility.
SAGE Scholars
At SAGE Scholars, we deeply believe in the value and quality of private higher education. Our mission is to provide access to affordable college opportunities while bringing together families, colleges & universities, and benefit providers to create college funding solutions. Since 1995, SAGE Scholars has bridged the gap between students who want a quality private college education and colleges that will work closely with member families to ensure affordability — all at no cost to the families.
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