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Ask the Expert: How do 529 college savings plans impact financial aid?

I opened a 529 college savings plan for my grandson 18 years ago. Now his parents are told at a financial seminar that this money will lower his financial aid eligibility. Was it financially foolish to contribute to a 529?

The rules aren’t as simple as they heard. Relax; your decision wasn't foolish.

College financial aid is granted annually. Annual eligibility is determined by the cost of attending a college minus a family's expected contribution, based on its assets and income. All colleges use the Free Application for Federal Student Aid (or FAFSA) form; some also use their own aid forms.

A 529 plan's impact on aid depends on who owns it, the timing of withdrawals, and the aid form. (Readers take note: This column applies only to grandparent-owned 529s and the FAFSA form.)

You’re not required to report a grandparent-owned 529 plan as an asset on the FAFSA, nor should you, says Kalman A. Chany, author of "Paying for College, 2019 Edition" (Penguin Random House). But you must report distributions from a 529 owned by anyone who's not required to report information on the FAFSA — for example, a grandparent. They're treated as the student's income, which might reduce his aid eligibility in a given year by 50 percent.

Your simplest solution, assuming he'll only be in college four consecutive years, is to wait until January of his sophomore year to tap the 529, says Chany. The reason: The FAFSA asks for income two years before the year for which aid is requested. Your grandson's aid application for the 2019-2020 school year — his freshman year — will report 2017 income. The FAFSA for his sophomore, junior and senior years will list 2018, 2019 and 2020 income, respectively. After Dec. 31, 2020, your 529 distributions won't affect his aid.

The bottom line

Financial aid rules are complicated.

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