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How Changes to FAFSA will Impact 529 College Savings Plan Beneficiaries

How Changes to FAFSA will Impact 529 College Savings Plan Beneficiaries

April 08, 2024

It’s that time of year again—when millions of college students (or their parents) go through the time-consuming process of applying for financial aid for college using the Free Application for Federal Student Aid (FAFSA).

However, those filling out the application should be aware of one key change to the FAFSA process resulting from the enactment of the Free Application for Federal Student Aid (FAFSA) Simplification Act (the Act)

This particular change will benefit FAFSA applicants who receive money to pay for college from grandparents or other friends and family members.

529 College Savings Plan distributions and other gifts no longer count

Qualified distributions from 529 Plans owned by parents or students used to help pay the student’s college expenses have never been counted as untaxed income for FAFSA calculation purposes.

However, until this year, FAFSA filers had to enter the value of 529 Plan distributions and other monetary gifts the student received from other sources, including grandparents, as untaxed income. This extra income could potentially reduce the student’s eligibility for financial aid.

Fortunately, the Act has changed this.

Starting with the 2024-2025 school year, FAFSA applicants no longer have to enter these monetary gifts or 529 distributions.

This is particularly good news for grandparents who own 529 Plans with their grandchildren as beneficiaries. Now, grandparents can make distributions from these accounts to help defray their grandchildren’s qualified college costs without having to worry that these distributions will jeopardize these students’ chances of receiving financial aid.

While this change is certainly good news, the Act has made additional changes to the FAFSA methodology that might motivate some parents to consider restructuring their 529 Plans. Speaking to a financial advisor may give you a better understanding of these issues.

This article was authored by David Jaeger and Jeffrey Briskin. David is a financial advisor at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.

©2024 Canby Financial Advisors.