A 529 plan is a popular way for a family to save for college, but some distributions could affect a student's financial aid package.
Although a grandparent-owned 529 plan does not have to be reported as an asset on the Free Application for Federal Student Aid (FAFSA), qualified distributions from such a plan must be reported as untaxed income to the student. This could reduce the financial aid available by up to 50 percent of the amount distributed.
The FAFSA program now looks back at tax returns from two years prior to determine financial aid eligibility. For example, if a distribution of $50,000 was made from a grandparent-owned 529 plan in 2016, the student would have to report untaxed income of $50,000 on the 2018–19 FAFSA application, which would reduce the financial aid package by $25,000.
By comparison, both student- and parent-owned 529 plans must be reported on the FAFSA. A student asset reduces aid eligibility by 20 percent of the asset value, and a parent asset reduces aid eligibility by 5.64 percent of the asset value. Qualified distributions from these plans will have no further effect on financial aid, however.
For more information, see the Federal Student Aid