Under the letter of current law, money in 529 college savings plans and prepaid tuition plans aren’t counted on the federal form for determining financial aid. That might be changed by Congress, though. In addition, many private universities require information about 529 plans before they decide on awarding aid.
Generally, financial aid applications require information from parents and children but not from grandparents. Therefore, one strategy is to set up a 529 account in a grandparent’s name. Some of the money in that account can come from the student’s parents.
This approach may result in more financial aid. On the other hand, parent contributions would be gifts to the grandparents, who would control the account. The grandparent could take money from that account, if he is willing to pay income tax and a 5 percent penalty. Thus, parents wishing to use this strategy should be on excellent terms with their own parents or in-laws.