College Financial Aid

The changes you need to know about.
Luke Strom, Megan E. Gehrman CFP® and Steven Finkelstein CFP®

The 5,593-page economic stimulus bill passed at the end of 2020 included some significant changes to the way that colleges will treat financial aid. These changes, which take effect in the 2023-24 school year, have consequences for both current students and those attending college for the first time. Here are some of the most notable details.

Grandparent-Owned 529 Plans

The first major change is how colleges will treat non-parent-owned 529 plan distributions. If you're familiar with how the Free Application for Federal Student Aid (FAFSA) works, you know that well-intentioned grandparents making distributions out of 529 plans could actually harm their grandchild’s need-based financial aid by as much as 50 percent.

Currently, FAFSA treats 529 plan distributions from a grandparent (or any non-parent) as untaxed income to the student, which becomes assessed at a rate of 50 percent (versus a rate of 5.64 percent if the 529 plan was owned by a parent). For example, if a distribution was made for $20,000 out of a grandparent-owned 529 plan, this could reduce the student's need-based financial aid by up to $10,000.

A welcome change in the stimulus bill has removed this untaxed income provision. Starting in the 2023-24 school year (when schools will analyze 2021 tax information), 529 plans owned by grandparents or other non-parent entities will no longer hurt a student’s eligibility for need-based financial aid. This change means that it could be more advantageous for grandparents to open up plans for their grandchildren or to transfer the ownership of existing 529 plans away from the student’s parents (so the plans would not be considered parental assets).

Multiple Student “Discount”

The second big change to the financial aid environment is not as welcome. When a family has multiple students in college, FAFSA currently divides the parent assessment by the number of family members in college. This lowers the expected family contribution for each student, thereby increasing their financial aid opportunities.

However, starting on July 1, 2023, the multiple student “discount” will be eliminated. This change has the potential to significantly affect middle-and higher-income families who have multiple students in college at the same time (whereas lower income families often have an expected family contribution of zero, which would remain unchanged). Furthermore, any student currently in college under the “old rules” is not exempt. That is, if their sibling starts college in the 2023 school year or beyond, both students’ FAFSA will be affected.

These two items are just a few of the changes that were passed as part of the FAFSASimplification Act contained within the latest economic stimulus bill. Stay tuned to the AAANewsletter andAAA.comfor more information about our upcoming fall education events, which include sessions onSavvy Social Security PlanningandCollege Financial Aid. 

Should you wish to learn more in the meantime or discuss your individual situation, we at Sterling Retirement Resources are happy to answer questions. Please call our office at (763) 762-3400.


Steven C. Finkelstein, CFP, Megan E. Gehrman, CFP, and Luke J. Strom, CFP are financial advisors at Sterling Retirement Resources, Inc., 120 Broadway Ave. S., Suite 200, Wayzata, MN 55391.

Securities and advisory services offered through Cetera Advisor Networks LLC, MemberFINRA/SIPC, a Broker-Dealer & Registered Investment Advisor. Some advisory services also offered through AdvisorNet Wealth Management. Cetera is under separate ownership from any other named entity.

Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing.

Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investors should consult their financial or tax advisor before investing in any state’s 529 plan.