Originally Posted by ElizabethN
What (if any) is the downside of having grandparents hold the 529s, instead of parents?
I had the same thought, but it appears that the advantage of doing this was removed in 2007:

http://www.finaid.org/savings/loophole.phtml

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Section 529 College Savings Plan Loophole

There is a loophole in the law concerning the treatment of a section 529 college savings plan that is owned by someone other than the parent or student. However, the College Cost Reduction and Access Act of 2007 changed the treatment of such plans effective with the 2009-10 award year. The change eliminates the benefit of the loophole.

Assets of Third Party Account Owner

If the student is a dependent student, only qualified education benefits that are owned by the student or the parent are reported as assets on the Free Application for Federal Student Aid (FAFSA). Qualified education benefits that are owned by a grandparent (or any third party other than the student or parents) are not reported as an asset on the FAFSA. (Qualified education benefits that are owned by the student, such as a custodial 529 plan account, are reported as parent assets on the FAFSA. This provides them with a more favorable treatment than the treatment normally given to student assets.)

If the student is an independent student, all qualified education benefits that are owned by the student are reported as student assets on the FAFSA, regardless of who owns the qualified education benefit. (If the independent student does not own the qualified education benefit, but is named as a beneficiary, the qualified education benefit is not reported as an asset on the FAFSA. The reporting of a qualified education benefit as an asset is based on account ownership, not the beneficiary, as the account owner can change the beneficiary at any time.)

The term "qualified education benefit" includes section 529 college savings plans, prepaid tuition plans and Coverdell education savings accounts.


This loophole applies only to the FAFSA. The CSS/Financial Aid PROFILE form asks the family to list all 529 college savings plans that name the student as a beneficiary, regardless of whether the student is dependent or independent, so plans owned by a grandparent but with the student named as a beneficiary would have to be reported. (College savings plans that name a sibling as a beneficiary or which are owned by the student or the student's parents are also reported on the PROFILE form.)