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80% of consumers have used a payment app, according to a survey by NerdWallet.
Democratic lawmakers are supporting a proposed rule by the Consumer Financial Protection Bureau that would require federal oversight of digital wallets and payments, forcing them to comply with federal funds transfer, privacy, and other consumer protection laws. 
Payment apps charge fees for the convenience of instantly transferring money or linking their credit cards to the app if they use Apple Cash, CashApp, PayPal or Venmo.

Close up of a woman’s hand paying with her smartphone in a cafe, scan and pay a bill on a card machine making a quick and easy contactless payment. 
D3sign | Moment | Getty Images

Payment apps have come under scrutiny by lawmakers and regulators as their usage skyrockets.
It only takes a tap to instantly send money to friends and family. Customers also use them to quickly buy goods online.

That ease of use has 80% of Americans using mobile payment apps, according to a recent survey by NerdWallet. What’s more, 50% of those respondents said they use these apps at least once a week. 
Transaction volume across all payment app service providers in 2022 was estimated at about $893 billion, according to the Consumer Financial Protection Bureau.
That agency also estimates tap-to-pay transactions from digital wallets will soar by 150% between now and 2028.
Meanwhile, there are growing concerns about financial safety for consumers.
The CFPB is focused on “erecting guardrails and some requirements and obligations for non-traditional players who are offering services very similar to a bank-based product,” said Amy Zirkle, the CFPB’s senior program manager for payments.   

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To that point, greater oversight of mobile payment apps may be coming.
Democratic lawmakers on Capitol Hill are supporting a proposed rule by the CFPB that would require federal oversight of digital wallets and payments, forcing them to comply with federal funds transfer, privacy and other consumer protection laws that they are not currently required to follow. 
Lawmakers are also calling on payment app companies to clarify their reimbursement policy if consumers get scammed and to make it easier for users to report fraud. 
“People lose their money because payment apps and banks don’t put enough measures in place to protect their customers,” said Sen. Sherrod Brown, D-Ohio, chairman of the Senate Banking Committee, at a hearing earlier this month on scams in the banking industry. 
Still, new regulations take time to be put in place. In the meantime, experts say that consumers need to understand how these apps work, the fees that may be charged and the risks involved in storing money in a mobile payment app. 

How payment apps work 

Payment apps like Cash App, PayPal or Venmo store payment information and allow the user to make payments online or in person and send money to friends and family.
Meanwhile, Zelle, a popular peer-to-peer digital payment app, lets users trade money with friends and family directly from a bank account. That program ties directly to a bank or credit union account and transfers funds directly.
Unlike Cash App, PayPal and Venmo, Zelle does not allow a user to carry a balance in the app. 
A digital wallet, such as Apple Wallet or Google Wallet, does double duty as a payment app, using Apple Pay or Google Pay, and a place to store information like health insurance cards and loyalty cards for hotels, airlines and other merchants.

Payment app fees can be costly 

Payment apps sometimes charge fees for the convenience of instantly transferring money or linking credit cards to the app if they use Cash App, PayPal, or Venmo. 
Cash App doesn’t charge to send money that is processed within one to three business days, but instant payments have fees ranging between 0.5% and 1.75%. PayPal and Venmo, which PayPal owns, charge a fee of 1.75% of the transfer value or up to $25 for instant transfers. 

With PayPal and Venmo, the user will not pay a fee if they send money to people using your PayPal or Venmo balance from your bank account or debit card. However, if you send a payment that is funded by your credit card, you’ll be charged a 3% fee for the total amount of the transaction. CashApp also charges 3% for payments tied to credit cards.
Zelle does not charge an extra fee for an instant transfer. However, Zelle recommends confirming with your bank or credit union that there are no fees for Zelle transactions.
About 33% of mobile payment app users link their apps to a credit card, and 24% usually pay the fee to get instant transfers from the payment app to their bank account, according to the NerdWallet survey. Those fees can add up quickly. 

Money sitting in most payment apps is at risk 

Most people who use payment apps keep their money sitting in those apps instead of transferring the funds to a bank account. That’s risky, experts warn. 
“Do not treat this like a bank because it doesn’t give you the same level of protection for your funds,” CFPB’s Zirkle said. 
The money you keep in most payment apps is not Federal Deposit Insurance Corp. insured, which provides protection up to $250,000 if a federally insured bank or credit union fails. 
Because money stored on payment apps is generally not insured, it can be risky to use it for that purpose, the CFPB says.
And, if the app fails, the CFPB warns, “your money is likely lost or tied up in a long bankruptcy process.”
To help protect funds in payment apps, link the app to your bank account and transfer money from the payment app as soon as you receive it, experts say.

Protect yourself from payment app scams

 Payment apps aren’t regulated as heavily as debit and credit cards, so you might still be on the hook for unauthorized payments if a scammer gets control of your account. 
“If you get tricked and send money to a thief, you’ve authorized that transaction,” said Scott Talbot, executive vice president of the Electronic Transactions Association, representing the payments industry. “The industry is focused on educating consumers to prevent them from getting tricked in the first place.”
The Federal Trade Commission advises consumers to never give out their access codes, protect accounts with a PIN or multifactor authentication and to double-check the recipients information before sending money. 
If you get an unexpected request for money from someone you recognize, speak with them to make sure the request is from them — and not a hacker who got access to their account. If you think you may have been scammed, contact the payment app directly and also file a report with the FTC at reportfraud.ftc.gov.
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“Redditors’ participation in this offering could result in increased volatility in the market price of our Class A common stock,” the filing said.
The filing did not say what percentage of the shares would be allocated through the program.
The site’s WallStreetBets chat room was the epicenter of the meme stock craze in 2021, as users urged one another to bid up stocks such as GameStop and AMC Entertainment.

Reddit logos
Dado Ruvic | Reuters

Reddit’s initial public offering will include a quirk that allows some of its most active users to buy the stock. That could make the deal riskier for other investors.
On Thursday afternoon, the social media company’s S-1 filing revealed that some Reddit moderators and other users would get the opportunity to participate in the offering through a directed share program. This is unusual for companies, as IPOs are bought primarily by institutional investors.

“Our users have a deep sense of ownership over the communities they create on Reddit. This sense of ownership often extends to all of Reddit. We see this in our users’ passion for their communities, their desire for Reddit to be as amazing as possible, and in their disapproval when we let them down. We want this sense of ownership to be reflected in real ownership — for our users to be our owners. Becoming a public company makes this possible. With this in mind, we are excited to invite the users and moderators who have contributed to Reddit to buy shares in our IPO, alongside our investors,” the filing said.
But the so-called Redditors also earned several mentions in the “Risk Factors” section of the filing. In addition to cautionary statements about the reliance of the business on its users, the IPO participation was highlighted as its own risk.
“Redditors’ participation in this offering could result in increased volatility in the market price of our Class A common stock,” the filing said.
Many IPO investors, either formally or informally, agree to a lock-up period, which means they will not sell their allocation of shares right after trading begins. But the Reddit users that participate in the IPO will not be subject to a lock-up agreement, the filing said, which could add to volatility in the stock. The filing did not say what percentage of the shares would be allocated through the program.
Reddit users have already proven that they have a taste for trading volatile stocks. The site’s WallStreetBets chat room was the epicenter of the meme stock craze in 2021, as users urged one another to bid up stocks such as GameStop and AMC Entertainment.
As for which Redditors will be able to participate, the filing said that Reddit will invite eligible users and then allocate shares through a tiered system based on “karma (a user’s reputation score that reflects their community contributions)” as measured by other users. More

The Biden administration has forgiven student debt for millions of people.
Some borrowers have also received large refunds. Here’s what to know.

U.S. President Joe Biden delivers remarks at an event at Culver City Julian Dixon Library, in Culver City, California, U.S. February 21, 2024. 
Kevin Lamarque | Reuters

When Marlon Fox, a chiropractor in North Charleston, South Carolina, got his student debt forgiven last year, he was thrilled. His $119,500 balance was reset to zero.
But the good news didn’t end there. Just two months later, the U.S. Department of Education also refunded him $56,801.

The government is reviewing the accounts of borrowers who have been making payments on their federal student loans for a decade or more, in an effort to identify those eligible for forgiveness. The Education Department has a number of programs that lead to loan cancellation, but many borrowers have missed out on the relief because of confusing rules and lender mismanagement, advocates say.
So far, almost 3.9 million borrowers have gotten their education debt erased, totaling $138 billion in relief. As many as 300,000 people may be eligible for refunds, too, according to an estimate by higher education expert Mark Kantrowitz.
Here’s what to know.

Why are borrowers getting refunds?

Under the U.S. Department of Education’s income-driven repayment plans, student loan borrowers are entitled to get any of their remaining debt forgiven after 20 or 25 years. Yet many are stuck making payments long after that period.
“This is due, in part, to strong financial disincentives for student loan servicers to inform consumers about the program and their ability to qualify for it,” said Nadine Chabrier, a senior policy and litigation counsel at the Center for Responsible Lending.

The Education Department contracts with different companies to service its federal student loans, including Mohela, Nelnet and Edfinancial, and pays them more than $1 billion a year to do so. The companies earn a fee per borrower per month, which advocates say discourages transparency around loan forgiveness opportunities.
The service providers did not immediately respond to a request for comment.
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Even when borrowers are enrolled in these plans, servicers sometimes fail to keep a record of their qualifying payments, experts say.
“Loan servicers were not tracking the number of qualifying payments, and the automatic forgiveness was not occurring,” Kantrowitz said. “As a result, some borrowers have been making payments for years, or even decades, beyond the point at which they should have received forgiveness.”
By the time Fox’s debt was canceled, he’d been in repayment for 35 years.
Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for federal student loan servicers, denied that the companies benefit by veering from the government’s orders.
“We are incentivized to meet the requirements that the government sets, which includes giving borrowers the benefits that the law provides,” Buchanan said. “We are audited, and get business or lose it based on meeting those standards.”
As the Biden administration reviews the number of payments borrowers have made under income-driven repayment plans, it is canceling the debt of those who’ve been in repayment for 20 or 25 years, said Persis Yu, deputy executive director at the Student Borrower Protection Center. (The timeline to forgiveness varies by plan.)
And it is also refunding borrowers for payments they made beyond when they were eligible for cancellation.

In some cases, borrowers who’ve pursued the Public Service Loan Forgiveness program are also receiving refunds after their debt cancellation.
PSLF, signed into law by then-President George W. Bush in 2007, allows nonprofit and government employees to have their federal student loans canceled after 10 years, or 120 payments. The program has been plagued by problems, however, making people who actually get the relief a rarity.
In 2021, Karen Tongson, a professor at the University of Southern California, got her debt forgiven and was refunded $20,000 by the Education Department.
By then, she had been paying her student loans for 16 years.
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Problems with the new FAFSA have resulted in fewer students applying for financial aid.
But it’s not too late for families worried about paying for college next year to get the help they need.
These strategies are a good place to start.

Getting into college is hard enough, but figuring out how to pay for it is even trickier.
Problems with the new Free Application for Federal Student Aid only add to the stress this year.

“All of these different pieces create a concern about placement and affordability,” said Eric Greenberg, president of Greenberg Educational Group, a New York-based consulting firm. “People are anxious.”
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Higher education already costs more than most families can afford, and college costs are still rising. Tuition and fees plus room and board for a four-year private college averaged $56,190 in the 2023-2024 school year. Meanwhile, a four-year, in-state public college averaged $24,030, according to the College Board.
For most students and their families, the amount of financial aid offered and the breakdown between grants, scholarships, work-study opportunities and student loans are key to covering those costs.
And yet, fewer students have applied for financial assistance at all. However, it’s not too late for families worried about paying for college next year to submit the FAFSA or reach out to the college financial aid office for more money. These three strategies can help.

1. Apply for financial aid

In ordinary years, high school graduates miss out on billions in federal grants because they don’t apply for financial aid. 
However, problems with the new FAFSA have resulted in even fewer students applying overall. As of the last tally, nearly 4 million students have submitted the 2024-25 FAFSA form so far.  
That’s a fraction of the 17 million students who used the FAFSA form in previous years, according to the U.S. Department of Education.
As of February, only 22% of the high school class of 2024 had completed the FAFSA, according to the National College Attainment Network, down roughly 45% from a year ago.
Submitting a FAFSA is also one of the best predictors of whether a high school senior will go on to college, the National College Attainment Network found. Seniors who complete the FAFSA are 84% more likely to immediately enroll in college. 
“If you’re a student and haven’t completed the FAFSA there is still time to do so and you absolutely should,” said Rick Castellano, a spokesperson for education lender Sallie Mae.
“Ultimately, you want to make the most informed decision as possible when it comes to paying for college so completing the FAFSA should still be a priority — it’s critically important when it comes to qualifying for need-based aid like grants, state-based aid, and scholarships,” he said.

2. Ask for more school aid

For families who have already filed the FAFSA but are still concerned about making ends meet, it is also possible to amend their FAFSA form or reach out to the college financial aid office for help, Greenberg said.
Because this year’s award letters are likely to look a lot different, that also opens the door for families to ask for more college aid.
For example, as part of the FAFSA simplification, families will no longer get a break for having multiple children in college at the same time, effectively eliminating the “sibling discount.”
In that case, you may be able to appeal to the college financial aid office, according to Menaka Hampole, assistant professor of finance at the Yale School of Management. “The question is whether people know that they can.”

If there are needs-based issues beyond what was noted in the financial aid paperwork, such as another sibling in college or changes in your financial circumstances, like a job loss, that should be explained to the school and documented, if possible.
Alternatively, if the financial aid packages from other, comparable schools were better, that is also worth bringing to the school’s attention in an appeal.
“It’s very important for students and families to know that financial aid offices tend to be very approachable,” Greenberg said.

3. Pursue private scholarships

It also makes sense to consider other sources for merit-based aid, Castellano advised. “Of course, continue to apply for scholarships,” he said.
In fact, there are more than 1.7 million private scholarships and fellowships available, often funded by foundations, corporations and other independent organizations, with a total value of more than $7.4 billion, according to higher education expert Mark Kantrowitz.
“Many don’t require a completed FAFSA,” Castellano said, and there are free resources that can match you to available scholarships based on your skills and interests.
Check with the college, or ask your high school counselor about opportunities. You can also search websites like Scholarships.com and the College Board.
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Most people ages 55 to 65 either failed or barely passed a 13 question true/false quiz on Social Security.
While many near-retirees expect Social Security to be their largest source of income in retirement, they do not necessarily know how to claim to get the most benefits.
Test your knowledge to see how much you know about the program.

Eclipse_images | E+ | Getty Images

Many near retirees expect Social Security to be their largest source of income when they stop working.
Yet, those who are on the brink of their so-called golden years fall short when it comes to knowledge about the program’s rules and what they can personally expect, according to a new survey from MassMutual.

When put to the test with a 13 question true/false Social Security quiz, 78% of respondents ages 55 to 65 failed or barely passed. That includes 41% who failed and 37% who got a D.
Less than 1% of the 1,500 respondents who took the quiz in January got a perfect score by answering all 13 questions correctly.
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This year’s respondents fared worse in MassMutual’s quiz than they did in 2023, when 69% either failed or barely passed.
To test your knowledge on Social Security, decide whether you think the following statements are true or false and compare your answers to the answer key below.

True or False?

1.      In most cases, if I take benefits before my full retirement age, they will be reduced for early filing.
2.      If I am receiving benefits before my full retirement age and continue to work, my benefits might be reduced based on how much I make.
3.      If I have a spouse, he or she can receive benefits from my record even if he or she has no individual earnings history.
4.      If I have a spouse and he or she passes away, I will receive both my full benefit and my deceased spouse’s full benefit.
5.      Generally, if I am in a same-sex marriage, there are different eligibility requirements when it comes to Social Security retirement benefits.
6.      The money that comes out of my paycheck for Social Security goes into a specific account for me and remains there, earning interest, until I begin to receive Social Security benefits.
7.      If I get divorced, I might be able to collect Social Security benefits based on my ex-spouse’s Social Security earnings history.
8.      Under current law, Social Security benefits could be reduced by 20% or more for everyone by 2035.
9.      Under current Social Security law, full retirement age is 65 no matter when you were born.
10.   If I file for retirement benefits and have dependent children age 18 or younger, they also may qualify for Social Security benefits.
11.   If I delay taking Social Security benefits past the age of 70, I will continue to get delayed retirement credit increases each year I wait.
12.   Social Security retirement benefits are subject to income tax just like withdrawals from a traditional IRA account.
13.   I must be a U.S. citizen to collect Social Security retirement benefits.

Sporrer/Rupp | Image Source | Getty Images

Answers:

1.      True (92% answered correctly)
2.      True (84%)
3.      True (75%)
4.      False (70%)
5.      False (70%)
6.      False (65%)
7.      True (59%)
8.      True (58%)
9.      False (55%)
10.   True (53%)
11.   False (48%)
12.   False (38%) (Note: While both Social Security and IRA income may be taxed, special rules limit taxes on Social Security income to only up to 85% of benefits.)
13.   False (23%)

Social Security literacy helps you avoid ‘tragic mistakes’

The question most respondents were able to answer correctly was whether their Social Security benefits would be reduced if they claimed earlier than their full retirement age. Most respondents, 92%, correctly answered that they will.
However, fewer than half of respondents, 48%, were able to correctly say whether there’s a benefit to delaying benefits past age 70 — there isn’t.

If you realize at, say, age 72, that there’s no longer an advantage to holding off on receiving benefits, a six-month look-back period will let you recoup some of the money you would have received. But any benefits you could have received dating back longer than six months are lost, according to David Freitag, a financial planning consultant and Social Security expert at MassMutual.
Knowing your Social Security full retirement age — the point when you are eligible to receive 100% of the benefits you’ve earned — is necessary to make a good claiming decision, Freitag said.
Yet, almost half of near-retirees, 45%, do not know the current full retirement age.
A wave of baby boomers is expected to turn 65 in the next few years, which has been dubbed a “silver tsunami.” While age 65 is when individuals become eligible for Medicare, Social Security’s full retirement age is generally age 66 to 67, depending on a person’s date of birth.
“The window opens at 62 and it closes at 70,” Freitag said of Social Security retirement benefit claiming. “You’ve got to figure those decisions into that period of time, or you’ll make tragic mistakes, and that’s not a good thing.”

Age 65 is important because the Medicare penalty can be very significant if you do not sign up for health coverage on time, Freitag said.
Figuring out what you will do about health insurance and when you plan to claim Social Security are the two anchor points from which to start in the retirement planning process, Freitag said.
“Get those two things anchored down, and then you can start to make the decisions around those two points,” Freitag said.
Even as near-retirees’ knowledge of Social Security falls short, 40% expect the program will be their biggest source of income in retirement. That is followed by a 401(k) or 403(b) plan, with 17%; pension, 13%; and investments, 11%.
However, 44% said they do not know approximately how much income their Social Security retirement benefits will replace.Don’t miss these stories from CNBC PRO: More

The cost of housing is generally expensive across the board for Americans, whether you’re a renter or an aspiring homeowner.
While both housing and rent prices have outpaced wage growth in most areas, renting can be the smarter financial choice in some markets, said Susan M. Wachter, a professor of real estate and finance at The Wharton School of the University of Pennsylvania. 

Sturti | E+ | Getty Images

The cost of housing is generally expensive across the board for Americans, whether you’re a renter or an aspiring homeowner.
While both home prices and rent have outpaced wage growth in most areas, renting can be the smarter financial choice in many markets, said Susan M. Wachter, a professor of real estate and finance at The Wharton School of the University of Pennsylvania. 

“The cost of homeownership versus renting has been [making it] daunting to become a homeowner. It’s less expensive to be a renter in most markets in the U.S.,” Wachter recently told CNBC.
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There is no one-size-fits-all answer when you’re deciding whether to buy or rent. What’s right for you will depend on factors such as monthly income, outstanding debt balances and how long you plan to remain in that home, said Jacob Channel, a senior economist at LendingTree.
It’s generally cheaper to rent than own in the country’s 50 largest metropolitan areas, according to a recent study by LendingTree. Between median rent costs and median homeowner costs for those with mortgages, tenants came out ahead by $563 per month in 2022.

Owning a house may be ideal, but costs remain high

Owning a home can help you build wealth, and after you finish paying the mortgage, owning a place will probably be cheaper than a rental, Channel said.

You also have more freedom as a homeowner that renters may not have, such as the option to install new appliances, paint or do even small home-improvement projects including mounting a TV to a wall, Channel explained.
“If you want to paint your walls neon pink, go for it,” he said.

The costs of owning a home can be more stable compared to rent prices. Your mortgages may be fixed for up to 30 years, while the rent price for a unit could increase with each lease renewal.
Homeowners may also have more protections and options than renters do if they find themselves struggling financially.
Yet, the upfront cost of a down payment is high for most Americans, Wachter said.
“Stability is clearly an advantage to a homeowner, but the cost and the down payment can make it unaffordable,” she said. 
The median down payment for single-family homes and condominiums in the U.S. was $35,050 in the third quarter of 2023, according to ATTOM, a property data site. This was a 12.2% increase from $31,250 in the prior quarter.

House prices grew 7% in 2023, far exceeding both wage growth and rents, Wachter said.
Mortgage rates also remain high for potential homebuyers, spiking back to 7.06% from 6.87%. The interest rate affects the monthly cost of a home, which can make or break affordability for a homebuyer.

Rent prices are also expensive

The median asking rent price rose to $1,964 in January, up 1.1% from a year ago, according to real estate site Redfin. While rent prices are slightly higher, growth is slowly declining from record highs during the Covid-19 pandemic.
When you compare upfront costs, renting is likely to be less expensive than buying a house, Channel said.
The total immediate cost to rent a unit may include a security deposit and a potential broker’s fee, which is still a lot less money compared to a down payment.
Even if you have enough money to buy a house, there are incentives to renting. There are millionaires in the U.S. who can afford to buy a property but choose to rent, Channel said. Your landlord is responsible for physical repairs and infrastructural upkeep of the apartment, as well as making sure to pay the property taxes.
While rents have not increased at the same rate as home prices, rent costs have outpaced wages, making it more difficult for renters to save for a down payment, Wachter said.
“There are renters who are simply discouraged from saving because it has become so difficult in some markets to become a homeowner,” she said.

In fact, rent costs are so high that half of renters are cost burdened, meaning they spend more than 30% of their monthly income on rent, according to recent analysis by the Joint Center for Housing Studies at Harvard University. 
Some indicators show that rent prices are stabilizing due to vacancy rates, which came back to 6.6% in the fourth quarter of 2023, and remained flat from the prior quarter at the highest level since 2021, according to the Federal Reserve. Vacancy rates have been improving in recent years as more newly built apartment units come on the market.Don’t miss these stories from CNBC PRO: More

Smart Tax Planning

The IRS plans “dozens of new audits” of corporate jet usage as part of its increased scrutiny of large corporations, complex partnerships and top earners.
The agency believes some companies overstate business deductions when using corporate aircraft for mixed business and personal travel.
Plus, some individuals may be using corporate jets for personal trips without reporting the perk as income.

Drazen_ | E+ | Getty Images

The IRS on Wednesday unveiled plans for “dozens of new audits” of corporate jet usage as part of its increased scrutiny of large corporations, complex partnerships and top earners.
More than 10,000 corporate jets operate in the U.S., and the agency believes some companies overstate deductions while using aircraft for mixed business and personal travel. Plus, individuals may not be reporting personal trips via corporate jet as income, the IRS said.

The agency will begin with a round of three to four dozen audits of corporate jet usage, focused primarily on corporations and complex partnerships. But future exams could expand to individuals, depending on the findings.

Business use of corporate aircraft can be a legitimate deduction, but there needs to be a clear breakdown of business versus personal travel and “record-keeping can be challenging,” IRS Commissioner Danny Werfel told reporters Wednesday on a press call.
“These aircraft audits will help ensure high-income groups aren’t flying under the radar with their tax responsibility,” he said.

Plans to reverse ‘historically low audit rates’

The agency’s latest plans are part of a broader effort to collect unpaid taxes by reversing “historically low audit rates” of large corporations, complex partnerships and higher earners, as Werfel discussed during a House Ways and Means Committee hearing last week.
The audit rate for taxpayers earning $1 million or more was 0.7% in 2019, compared to 7.2% in 2011, according to the IRS.

“The IRS is focused on increasing scrutiny on the complex high-income returns where there’s high risk of non-compliance and in some cases, purposeful tax evasion,” Werfel said during the press call on Wednesday.
The tax gap, or the difference between taxes owed and paid, was an estimated $688 billion for tax year 2021, the agency reported in October. More

The new FAFSA’s streamlined form eliminates questions about grandparent contributions, effectively creating a “loophole” for grandparents to fund their grandchild’s college fund without impacting their financial aid eligibility.
Middle-income families who have the capacity to save will benefit the most, according to Michael Green, a financial advisor at Apollon Wealth Management.

How the FAFSA’s grandparent ‘loophole’ works

The simplified FAFSA form now uses a new calculation called the “Student Aid Index” to estimate how much a family can afford to pay.
Previously, many factors went into how much aid students receive, including the total number of people in the household and the number of children in college, as well as various sources of income.

Under the old FAFSA rules, assets held in grandparent-owned 529 college savings plans were not reported on the form, but distributions from those accounts counted as untaxed student income. The formula could reduce aid by up to half of that income.
“That was a very serious penalty,” said higher education expert Mark Kantrowitz.
Now, this new formula pulls federal tax information directly from the IRS and slims 108 questions down to less than 50.

Middle-income families may benefit the most

Without those questions about other sources of income, middle-income families who have the capacity to save will benefit the most, according to Michael Green, a financial advisor at Apollon Wealth Management in Charleston, South Carolina.
Green advises his clients to open a 529 plan for their grandchildren to help them pay for college, when that fits with their financial goals, especially now that there’s less of a chance of it hurting their aid eligibility.
“If it’s possible to have them off the radar, it’s definitely helpful,” he said.
One caveat for parents, Green added, “You are taking the reins and giving it to someone else, that requires some thought and requires that families be on the same page.”
The grandparent owns and controls the account and that money can be considered an asset for their Medicaid eligibility purposes, which is another aspect worth noting for planning purposes.

Still, the idea of a loophole is not entirely new, according to Kalman Chany, a financial aid consultant and author of The Princeton Review’s “Paying for College.”
“There were always planning strategies that families could use when it came to third-party 529 plans,” Chany said.
And even now, colleges may still take some contributions from grandparents into account on the CSS profile to award nonfederal institutional aid, he added.
“Even with this change, you still need to look before you leap if grandparents are going to help pay for college,” Chany said.

The other advantages of 529 plans

Already, experts widely consider 529 plans the best way to save for college. Further, restrictions have loosened in recent years to include continuing education classes, apprenticeship programs and even student loan payments. And, as of 2024, families can also roll unused money from 529 plans over to Roth individual retirement accounts free of income tax or tax penalties.
Any additional change that encourages families to save more for college is beneficial, according to Kantrowitz.
“Expanding the capabilities of 529 plans and sheltering them more is a step in the right direction,” he said.
Correction: Michael Green is a financial advisor at Apollon Wealth Management in Charleston, South Carolina. An earlier version misidentified the state.
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