Grandparent-Funded 529 Plans: What the New FAFSA Rules Change for Your Family

*A provision that once made generous grandparents think twice disappeared from the federal aid formula in 2024 — but it didn't disappear everywhere.*

For years, financial planners routinely advised grandparents to hold off on opening a 529 plan for a grandchild, or to wait until the last possible semester to use it. The reasoning was sound at the time: money coming out of a grandparent-owned account could reduce a student's federal financial aid by as much as half the distribution amount. A well-meaning $10,000 tuition payment could cost a family $5,000 in aid eligibility the following year. That rule is gone for the FAFSA. It is still very much alive on the form roughly 200 private colleges use instead.

If you're a grandparent thinking about helping fund a grandchild's education, or a parent wondering whether to let grandparents open their own account rather than contribute to yours, the distinction below is worth understanding before any money moves.

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What the Old Rule Actually Penalized

Under the previous FAFSA methodology, a distribution from a 529 plan owned by anyone other than the student or the student's custodial parent — most commonly a grandparent — was reported as untaxed income to the student. Student income has historically been assessed far more heavily than parental income or assets in the federal aid formula, which is why a single large distribution timed at the wrong moment could meaningfully shrink an aid offer for the following year.

The account itself was never counted as an asset under the old rules. It was only the withdrawal that created the problem, which led to some awkward maneuvering: families delaying distributions until the student's final term, when there would be no "following year" of aid left to lose.

What Changed, and When

The FAFSA Simplification Act overhauled the aid formula starting with the 2024–25 award year. Two things changed for grandparent-owned 529 plans specifically: distributions are no longer reported as student income, and the accounts themselves are not reported as an asset. In practical terms, a grandparent can now fund a grandchild's education directly from a 529 plan they own and control, at whatever point makes sense for the family, without that money touching the FAFSA calculation at all.

That's a genuine shift in how these accounts get used, not just a technical footnote. It opens up ownership and funding decisions that used to be constrained by aid-timing concerns.

The Exception Worth Knowing

The CSS Profile, used by several hundred private colleges and universities for their own institutional aid, did not adopt this change. Grandparent-owned 529 assets and distributions can still factor into a CSS Profile-based aid calculation. A family applying to a mix of public universities and CSS Profile schools may find the same account treated two different ways depending on where the student ultimately enrolls.

Deciding Who Should Own the Account

With the FAFSA penalty removed, the choice between a parent-owned and a grandparent-owned 529 comes down to control, flexibility, and estate planning rather than aid strategy alone. A few questions worth exploring with your advisor and estate attorney:

**Who should control the timing and amount of distributions?** A grandparent-owned account stays under the grandparent's control for as long as they choose, and the beneficiary can be changed to another grandchild if plans shift.

**Does moving assets out of a taxable estate factor into your planning?** Contributions to a 529 plan are completed gifts, removing that money — and its future growth — from the grandparent's estate immediately, which some families view as a meaningful piece of a broader legacy plan.

**Would a CSS Profile school realistically be in the mix?** If so, coordinating account ownership with the family's overall aid strategy deserves a specific conversation rather than a general rule of thumb.

Funding the Account Efficiently

Contributions to a 529 plan count as gifts for tax purposes, but the annual gift tax exclusion — $19,000 per recipient in 2026 — lets most grandparents fund an account gradually with no gift tax filing at all. A married grandparent couple splitting gifts can contribute up to $38,000 per grandchild per year under that same exclusion.

For grandparents who want to contribute a larger sum upfront, the tax code allows a special election to treat a lump-sum 529 contribution as if it were spread evenly over five years. In 2026, that allows an individual to contribute up to $95,000 per beneficiary at once — $190,000 for a married couple — without dipping into their lifetime gift and estate tax exemption, provided they file the appropriate gift tax return to make the election and avoid any further gifts to that beneficiary during the five-year window.

A Hypothetical Family

Consider Warren and Diane, a hypothetical retired couple in their late 60s with three grandchildren, including a new granddaughter named Mia. They'd assumed for years that any 529 they opened for Mia would hurt her aid prospects down the road, so they'd planned to write checks directly to her college instead once she enrolled. After learning the FAFSA treatment had changed, they revisited that plan with their advisor and decided a grandparent-owned 529, funded gradually using their annual exclusions, gave them more flexibility and kept the option open to redirect funds to a sibling if Mia's plans changed. Their situation is invented for illustration, but the underlying questions — control, timing, and which schools are realistically in play — are the same ones worth asking in any family's actual case.

Is a Grandparent-Owned 529 the Right Move for Your Family?

The FAFSA change removed a genuine obstacle, but it didn't make the decision automatic. Whether a grandparent-owned account, a parent-owned account, or some combination makes the most sense still depends on which schools are likely candidates, how the family wants to handle estate and gift planning, and how much flexibility grandparents want to retain. Those are questions worth exploring with a planner who can look at the whole picture rather than the aid form alone.

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*Ben Loughery is a CERTIFIED FINANCIAL PLANNER® and founder of Lock Wealth Management, based in Atlanta, GA. He specializes in retirement income planning, tax optimization, and helping clients build financial confidence at every stage of life.*