Question...are funds in a 529 account weighted more heavily when applying for financial aid, than funds in a Roth IRA? If so...I'd put as much in a Roth IRA as I legally could (must have earned income, etc. etc.). Even if you have no intention whatsoever for using those funds for retirement. You can withdraw the PRINCIPAL amount penalty-free. Put in $10,000, you can withdraw $10,000. Hey, if he has earned income from last year and this year...and if the new Roth IRA limits are $10,500...that's a total of $21,000 he could possibly put into a Roth IRA. And while most of us consider a Roth IRA as consisting of stocks, funds, etc., it can be a wide range of things (from real estate to savings accounts). Since he's looking to use the money in the near future, put it in a savings account, or something that has virtually no risk (and likely a very poor interest rate to boot). So that $21,000 turns into $23,000 by the time he's ready to use it, and he pulls out the full $21,000 (the principal amount). He still has $2,000 in a Roth IRA, not great but also better than nothing. And if having the funds in a Roth IRA helped him to better qualify for financial aid, so much the better (seriously though, this is murky territory that I haven't dealt with for many, many years...do your own research on how money in varying accounts affects financial aid).
Oh, to reiterate the Roth IRA eligibility...you certainly CAN use that money to fund a Roth IRA, but only if you had enough earned income (and meet other eligibility). I.e. if you earned $12,000 last year, spent it all on bills...and your grandparents gifted you $10,500 to put in a Roth IRA, that's perfectly legal. The issue is if you had say, $1,000 in earned income last year, and your grandparents gifted you $10,500 to put in a Roth IRA...can't do it; your earned income was only $1,000, and you can't put more in a Roth IRA than you earned...$1,000 is the max that could be put in a Roth IRA for that year.
As far as federal rules goes, 529's do boost the EFC, thus lowering the amount of aid one is available for. Of course, the school can then go in and say, "they have a 529 and most of the bills are taken care of, so we will delve this aid out to others."
The Roth IRA or any type of retirement account is not seen as assets that are able to pay for a college education. If you withdraw from an IRA, it will be regarded as income for future years.
Last, the OP's BIL would need at least $5k income for 2012 and $5.5k income for 2013 to do the entire $10.5k for both years. Not other combination will get you there.
"If you only have 1 year to live, move to Penn...as it will seem like an eternity."
Good to see you back, I was starting to miss your incisive commentary!