As a grandparent, you hold a special role in shaping your grandchild’s future, and one impactful way to support them is through education. A 529 plan, a tax-advantaged savings account designed specifically for educational expenses, can be a powerful tool in your financial toolkit. Recent changes to the Free Application for Federal Student Aid (FAFSA) have reshaped how grandparent-owned 529 plans affect a student’s financial aid eligibility. These updates are particularly important for grandparents who want to contribute to college costs while preserving their grandchild’s chances of receiving financial aid.

By understanding these new rules, you can make informed choices that maximize your contributions without compromising your grandchild’s financial aid prospects. In this post, we’ll break down what these changes mean for you and how to strategically use a 529 plan to support your grandchild’s education.

Understanding 529 Accounts

A 529 account is a simple and effective way to save for education expenses, offering valuable tax benefits. Named after Section 529 of the tax code, these accounts let you invest money that grows tax-free—as long as it’s used for approved educational costs.
The main advantage of a 529 plan is that your investment earnings aren’t taxed at the federal level. Plus, many states offer additional tax breaks for contributions.

While there’s no federal limit on how much you can contribute each year, contributions to a 529 plan are considered gifts for tax purposes. The annual gift tax exclusion allows you to contribute up to $18,000 per beneficiary in 2024 (or $36,000 for married couples filing jointly) without triggering the federal gift tax. If you contribute more than this amount in a year, the excess will count against your lifetime gift tax exemption.

Meanwhile, each state sets a lifetime contribution limit, typically ranging from $235,000 to over $500,000, depending on the state. In Minnesota, for example, this limit is currently $425,000. Once you reach the lifetime limit, you cannot make any additional contributions.

Traditionally, 529 plans cover expenses like tuition, fees, books, and supplies for eligible colleges and universities. Recently, the list of approved uses has expanded to include certain K-12 education costs and student loan payments, giving families more flexibility.

Grandparent-Owned 529 Plans Under Previous FAFSA Rules

When a parent owns a 529 plan, the account’s value is considered a parental asset on the FAFSA. This means it can reduce financial aid eligibility by no more than 5.64% of the account balance. In contrast, grandparent-owned 529 plans weren’t reported as assets on the FAFSA, initially making them seem like a more favorable option.

The key difference, however, was how withdrawals were treated. Under previous FAFSA rules, distributions from parent-owned 529 plans were excluded from financial aid calculations, but withdrawals from grandparent-owned 529 plans were treated as untaxed income for the student.

This distinction is critical, as untaxed student income could reduce financial aid eligibility by up to 50% of the withdrawal amount. For example, a $20,000 withdrawal from a grandparent-owned 529 plan could potentially reduce a grandchild’s financial aid eligibility by $10,000 under the old rules.

As a result, families often developed complex strategies—like timing withdrawals or transferring account ownership—to minimize the impact on financial aid. Many grandparents, despite their desire to help, were cautious about using 529 accounts due to these potential financial aid reductions.

Benefits of the New FAFSA for Grandparent-Owned 529 Plans

The recent changes to the FAFSA bring great news for grandparents who want to contribute to their grandchildren’s education without worrying about affecting financial aid eligibility. These updates significantly change how grandparent-owned 529 accounts are treated in the financial aid process.

Under the new rules, distributions from grandparent-owned 529 accounts will no longer impact need-based financial aid. This is because the FAFSA now pulls a student’s “total income” directly from federal tax returns using the IRS Data Retrieval Tool (DRT). Since qualified 529 withdrawals aren’t reported on tax returns, they won’t count against a student’s financial aid eligibility.

This change provides grandparents with much more flexibility in supporting their grandchildren’s education. And since grandparent contributions are no longer considered student income, families may qualify for more need-based aid than they would have under the old rules.

Keep in mind, however, that grandparent-owned 529 plans are still considered when completing the CSS Profile, a separate financial aid form used by approximately 200 private colleges and universities to determine institutional aid. Distributions from these accounts may still impact a student’s eligibility for institutional aid, as the CSS Profile includes a broader range of assets and income in its financial calculations compared to the FAFSA.

Strategies for Grandparents Under the New FAFSA Rules

With the new FAFSA rules, grandparents now have more strategic options to support their grandchildren’s education.
First, you can make direct contributions to your grandchild’s education expenses without worrying about negatively impacting their financial aid eligibility. Whether you’re covering tuition, books, or other qualified expenses, your financial support will no longer count against their need-based aid prospects under the updated FAFSA rules.

Additionally, the timing of when you use your 529 account has become more flexible. You no longer need to wait until the later years of college to make withdrawals to avoid hurting your grandchild’s aid package. Now, you can use the funds whenever they are most needed, whether that’s their first year of college or later in their academic journey.

However, it’s still important to coordinate with the parents and the student to ensure everyone is aligned on the overall financial strategy. While your contributions won’t affect FAFSA-based aid, they could have an impact on other financial decisions or scholarships. Open communication can help optimize how you offer financial support.

Alternative Ways for Grandparents to Help with College Costs

While 529 accounts are a fantastic way to save for education, grandparents have several other options to help support their grandchildren’s college dreams. These alternatives provide flexibility and can be tailored to suit your personal circumstances and financial goals.

One effective approach is to make direct tuition payments to the educational institution. This method is not only straightforward but also offers the benefit of being exempt from gift taxes. This means you can contribute significant amounts toward tuition without triggering tax implications, making it an efficient way to fund education costs directly.

Another option is to assist with student loan repayments after your grandchild graduates. This strategy allows the student to take full advantage of financial aid opportunities during college, while you step in later to help ease their debt burden as they begin their career.

Additionally, you might consider contributing to a parent-owned 529 account. While recent FAFSA changes have made grandparent-owned accounts more appealing, some families might prefer consolidating education savings in a parent-owned account for the sake of simplicity or to maximize state tax benefits.

Each of these strategies offers its own set of advantages, and the best approach depends on your family’s unique circumstances. Again, open communication with your children and grandchildren is key to determining the most effective way to support their educational goals while considering the overall financial plan.

Estate Planning Considerations for Grandparent-Owned 529 Plans

When thinking about how to support your grandchildren’s education, it’s essential to view 529 accounts not just as a savings tool, but also as a valuable part of your overall estate planning strategy. These accounts offer unique benefits that allow you to transfer wealth to future generations while potentially reducing your taxable estate.

One major advantage of 529 accounts is the ability to make “accelerated gifts.” Currently, you can contribute up to five years’ worth of gifts at once—up to $90,000 per beneficiary (or $180,000 for married couples)—without triggering gift taxes. This provides a powerful opportunity to move substantial assets out of your estate quickly, all while maintaining control over the account.

Another key benefit is that, unlike many other gifts, you retain ownership of the 529 account, meaning you have full control over how the funds are used. Even though the assets are removed from your taxable estate, you decide when and how the money is distributed, giving you flexibility and peace of mind.

This combination of generous gifting allowances and ongoing control makes 529 accounts an attractive option for grandparents looking to both reduce their estate taxes and leave a lasting educational legacy for future generations.

Strategic Education Planning: Aligning Your Money with Your Life

The evolving landscape of education funding is creating more opportunities than ever for grandparents to support their grandchildren’s academic aspirations. Your contributions, whether through 529 plans or other methods, can have a lasting impact on their future. But beyond the financial aspect, your support represents an investment in their potential and a legacy of love and care.

While these changes offer greater flexibility, they also highlight the importance of thoughtful, strategic planning. Every family’s situation is different, and what works for one may not be the best approach for another. That’s why seeking professional guidance is essential.

Align Financial is here to help you explore your options, ensuring your generosity not only enhances your grandchildren’s educational opportunities but also aligns with your broader financial goals. Contact us today to develop a plan to maximize the impact of your contributions and provide meaningful, lasting support for your loved ones.