With 2014 underway, the race for college financial aid begins.
Families can file the Free Application For Federal Student Aid
(FAFSA) for the 2014-15 school year.
Even if your child is not yet in college, it's good to start
planning. The student's grandparents can chip in.
In 2014, the annual gift tax exclusion is $14,000. Gifts up to
that amount have no tax consequences. A hypothetical Al and Ann
Hill can give $28,000 to their grandson Josh this year without
any tax hit.
The Hills also can pay Josh's tuition bill directly to the
school. There is no limit, and no gift tax effect.
But such gifts to a student show up on the FAFSA. They can
reduce financial aid awards.
High-income families might not qualify for financial aid. But
they might get some help, in these days of hefty college bills.
That's especially true if multiple children are attending pricey
So you may want to avoid grandparent gifts to students or
direct tuition payments if you're hoping for financial aid.
Another option for grandparents is to make gifts to the
student's parents. The Hills can give up to $28,000 to Josh's
father this year. And $28,000 to his mother.
The other grandparents can do the same. None of these gifts
will be reported on the FAFSA.
But parents' assets are reported. An increase in assets can
decrease aid. But as long as parents use the gift money to pay
college bills before the date on which they sign their FAFSA, it
would not count as part of parental assets in calculating
For a youngster who will be a freshman next academic year, the
FAFSA might be filed early in 2014. Then the grandparents would
give a cash gift in the spring to the parents. The cash would be
used for college bills before the next FAFSA, for sophomore year,
is filed. That would be early in 2015.
Largesse For Loved Ones
Another option for grandparents is to own a 529 college
savings plan. Such plans offer tax-free investment buildup and
tax-free withdrawals for college bills.
Contributions count as gifts. But you can use up to five
years' worth of gift tax exclusion upfront.
So the Hills can give up to $140,000 to a 529 plan for Josh
this year: 5 times $28,000. If they give that this year, the
Hills may not be able to make any more tax-free gifts to Josh for
four more years.
Grandparent-owned 529s aren't reported on the FAFSA. So
grandparents can build up a large college fund without reducing
need-based federal financial aid.
But there's a catch. If the Hills tap a 529 account to pay
Josh's college bills, tax-free, those distributions will be
counted as FAFSA income for Josh. The impact on aid could be
One tactic would be to change ownership of the 529 account to
Josh's parents. Then the 529 plan would be reported as the
parents' asset but distributions wouldn't count as the student's
income. This could decrease aid modestly.
"The other solution is to wait until after the FAFSA is filed
for the senior year in college," said Mark Kantrowitz, publisher
of Edvisors.com, a network of websites about college funding.
Then the grandparent 529 can be tapped for college costs,
Suppose Josh starts college in August 2015. In January 2018,
during his junior year, he fills out the FAFSA for his senior
After that FAFSA is filed, Josh's grandparents can use their
529 to pay his remaining college bills. Those distributions won't
reduce financial aid if there are no more FAFSAs on which to