529 plan contributions are not deductible at the federal level, but over 30 states offer a tax deduction or credit for contributions. However, some states only allow the 529 plan account owner to claim the deduction. Grandparents need to check with their state’s rules and decide whether it makes sense to open their own account or contribute to a parent’s account.

A grandparent-owned 529 plan will have no effect on a student’s financial aid eligibility – as long as the funds remain in the account. But if the grandparent provides any type of financial support to the student (including withdrawals from a 529 plan), the amount is reportable as student income on the FAFSA. As much as 50% of student income will be counted as available funds to pay for college, so $10,000 from a grandparent-owned 529 plan can reduce need-based aid eligibility by as much as $5,000.