What to Know About 529 Accounts Owned by Grandparents & the New FAFSA

529 plans are a popular way for grandparents to save for college, and for good reason. With a 529 plan, you can build an educational legacy for your grandchild while taking advantage of tax and estate planning benefits.

Best of all, new FAFSA rules implemented in 2024 mean that grandparent-owned 529 accounts no longer affect a grandchild’s financial aid eligibility. This was not the case under prior FAFSA rules.

How have FAFSA rules changed?

Under the previous rules, distributions from a grandparent-owned 529 plan that were used to help pay for a grandchild’s college expenses were reported on the FAFSA form as untaxed student income. Student income can reduce federal aid eligibility by as much as 50% of the amount of cash support. For this reason, distributions from grandparent 529 plans could have had a significant impact on aid eligibility in the past. For example, a $10,000 529 plan distribution from a grandparent 529 plan to help pay for college could have reduced the grandchild’s aid eligibility by $5,000 under the previous rules.

Under the new rules, distributions from grandparent-owned 529 plans are no longer counted as student income, nor are grandparent 529 plans counted as an asset on the FAFSA. Grandparents who want to open their own 529 plans can now do so knowing that the savings they accumulate and spend on behalf of their grandchild won’t hurt the student’s federal financial aid eligibility.

With the new form, a student’s “total income,” which includes untaxed income, will come directly from federal income tax returns via the FUTURE Act Direct Data Exchange (FA-DDX), which has replaced the IRS Data Retrieval Tool (DRT). So, a student’s total income amount will only consist of data from the federal income tax return.

Note that this provision applies to any cash support for the student, regardless of the source, so other family members and loved ones can provide financial support without impacting financial aid.

While grandparent 529 plans are no longer considered on the FAFSA, they are still considered on the CSS Profile. The CSS Profile is an additional financial aid form used by about 200 private colleges to award their institutional aid.

529 Plan Tax Benefits for Grandparents

529 plans offer tax-deferred investment growth, and distributions are tax-free when used to pay for qualified education expenses. With these tax savings, you can build a substantial college fund for a grandchild without worrying about the money hurting any of their financial plans.

Depending on where you live and your plan, you may also be eligible for additional state tax benefits. Over 30 states allow residents to claim a state income tax deduction or credit for contributions to a 529 plan. Most of these states only offer tax benefits when you use your home state’s plan. Check your state’s rules to see if you qualify.

529 Plan Estate Planning Benefits

Some financial professionals advise grandparents to contribute to a 529 plan as part of an estate planning strategy. In most cases, you must consider the Generation Skipping Transfer Tax (GST) when leaving an inheritance to a grandchild. But 529 plan contributions up to $19,000 per beneficiary qualify for the annual gift tax exclusion in 2026. This means married grandparents who contribute $38,000 to a grandchild in 2026 would not include the amount in their taxable estate.

529 plan contributions above the annual gift tax limit will count against your GST lifetime exemption. In 2026, the GST tax exemption is the same as the lifetime gift tax exemption ($15 million). However, you can shelter an even larger gift if you elect to spread a lump-sum contribution between $19,000 and $95,000 over a five-year period in 2026. This strategy is called superfunding a 529 plan.

When you save for a grandchild in a 529 plan, you retain control of the assets over the life of the account, even though you removed the value from your estate. However, if you revoke the beneficiary’s gift, you must add the value back to your taxable estate.

The Bottom Line

With the new FAFSA changes in place, it’s an ideal time to set up a 529 plan for a grandchild who isn’t currently in school. You can start accumulating assets for them that won’t hurt their financial aid ability when they enroll. See our best 529 plans available in your state.

A 529 plan is a smart investment to set your grandchild up for success. 529 plans already offer numerous benefits for grandparents, and the new financial aid treatment makes them even more attractive. But Shannon Vasconcelos, director of college finance at Bright Horizons College Coach, warns that the financial aid process can change dramatically at any time.

“When it comes to preparing over 18 years for college payments, the best you can do is to plan based upon the information available to you at the time, but know that there is no guarantee that the rules in effect when you start saving for college will remain in effect when the time comes to pay for college,” she says. “The more you save, however, the better prepared you will be for whatever shifts in policy and priorities occur.”

Frequently Asked Questions (FAQs)

Is it better for a grandparent or parent to own a 529 plan?

There’s no reason both parent and grandparent can’t own a 529 plan, since a student can be named a beneficiary on more than one plan. If grandparents want to enjoy the tax and estate planning benefits of a 529 plan while leaving an educational legacy for their grandchildren, they can open one knowing that it won’t hurt future federal aid eligibility. Grandparents can also make cash gifts to a 529 plan owned by a parent.

Can grandparents write off 529 plan contributions?

More than 30 states offer a state income tax deduction to grandparents contributing to a 529 account. Grandparents may still qualify for this deduction even if someone else owns the account. The amount and eligibility will depend on the state where the grandparents reside.

How much can a grandparent contribute to a 529 plan?

There is no individual limit to how much you can contribute to a 529 plan in a year. Every account has a lifetime limit of primary contributions that it can receive, and it varies based on who administers the account. These aggregate limits can top $600,000, depending on the 529 plan, and don’t include any growth accumulation.

Grandparents should be aware, though, that they might be required to file a gift tax return if they give too much to a single account or beneficiary in a year.