It’s no secret that baby boomers and Generation X are notoriously poor savers. Whatever the reasons, there are likely large numbers from the boomer and Gen X group who find themselves unable to put away much money for their children’s college educations.

Enter the grandparents. According to a 2014 survey by Fidelity Investments, 53 percent of grandparents were saving or planned to start saving for grandchildren’s college expenses. A whopping 90 percent said that if asked, they would likely help with college costs in lieu of other gifts.

In addition, Fidelity reported a 12 percent increase in the number of new grandparent-owned 529 plan accounts in the first four months of 2014, as compared to the same period in 2013. Overall, Fidelity said about 15 percent of the 529 accounts managed for retail investors were owned by grandparents.

Many financial advisors encourage clients to open 529 college savings plans for grandchildren. Investments in 529 plans are free of federal income taxes until money is withdrawn for qualified educational spending.

Thirty-four states and the District of Columbia offer residents some kind of tax deduction or credit for contributions to a 529 plan.

While many cash-strapped parents appreciate the assistance from grandparents in financing their children’s education, families should be aware of a potential pitfall to grandparent-owned 529 accounts.

A 529 account owned by a grandparent is not reported on the Free Application for Federal Student Aid form. That form, which may be filed yearly, helps determine a college student’s eligibility for federal financial aid.

The federal government uses various formulas to determine the resources a student and his or her parents have available to pay for college.

For a parent-owned 529 account, as much as 5.6 percent of the value is deemed part of the expected family contribution. If a grandparent is the account owner, none of the value is part of that calculation.

However, 20 percent of student-owned assets, including investments, real estate or business ownership, are considered as being available to pay college costs.

A problem arises when funds from a grandparent-owned account are distributed for a grandchild’s education expenses. At that point, the funds are considered student-owned, and reduce the following year’s financial aid award by 20 percent.

It’s worth noting: The grandparent’s ownership of the 529 account does not affect the grandchild’s financial aid eligibility. Only when money is distributed is it considered the grandchild’s income.

Tom Mingone, founder and managing partner of Capital Management Group in New York, says grandparents have some options to offset potential reductions to a grandchild’s financial aid. One solution, he says, is to transfer account ownership to the student’s parents. In that case, distributed assets reduce future aid eligibility by a smaller amount than if assets were considered the student’s income.

However, some states, including Mingone’s home state of New York, do not permit those transfers. In those cases, grandparents should wait as long as possible before taking a distribution.

“Use Grandma and Grandpa’s money for the last year of college,” Mingone says.

For example, a student files his or her last FASFA form prior to the last year of college. Assuming the student has little or no income, the aid reduction is minimal for that final year. At that point, the student can use the grandparents’ money with no effect on financial aid.

“But let’s say the grandparents were saving for entire education. That would pose a challenge, because you would have a lot of excess money built up. You want to be careful in how you structure these, so you don’t cripple your financial aid package,” Mingone says.

People often misunderstand the impact a 529 plan may have on financial aid. However, parents and grandparents sometimes mistakenly believe that any investment in a 529 savings plan will eliminate the possibility of aid, which is not true.

In some cases, the family would not even be eligible for need-based financial aid, but could still enjoy the advantages of a 529 savings plan, such as tax-deferred growth.

If a student attends a private college, there may be other 529-related factors affecting financial aid. Many private institutions use their own formulas to determine financial aid, although the FAFSA may also be incorporated into the decision.

The key to maximizing the value of a 529 plan, in every situation, lies in the planning process, says Elizabeth DeBassio, senior financial advisor at Connecticut Wealth Management, in Farmington, Connecticut.

Families should discuss the question of when to use funds from grandparents’ 529 accounts, she says, rather than leave things to chance, which could result in mistakes.

“It’s an opportunity for parents and grandparents to work together and be aware of the assets, talk about the timing, plan out logistically what makes most sense,” DeBassio says. “These are the kinds of conversations we have with our clients every day, and it’s so beneficial to everyone involved.”

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Grandparents: Don’t Make a 529 Plan Mistake originally appeared on usnews.com