Grandparent-Owned 529 Plans and the ‘new’ FAFSA: What New Changes You Should Know

Ken Weingarten |

529 plans are generally seen as the most efficient way to save for college. In addition, the Free Application for Federal Student Aid (FAFSA) is another effective resource to determine needs-based financial aid and hopefully minimize out-of-pocket costs.

A new change was recently announced that would smooth out the financial aid process which specifically affects 529 plans owned by grandparents for the benefit of a grandchild. Here, we will go over the benefits of a grandparent-owned 529, the old rules affecting the financial aid process, and new rules going forward.

Grandparent-Owned 529 – The Pros

Beside the main benefit of helping a grandchild with the education costs, 529 plans offer gifting and estate planning benefits. Per the Internal Revenue Code:

  1. 529 plan contributions are viewed as completed gifts and therefore permanently removed from the contributor’s estate. Yet, grandparents can maintain control of the account.
  2. Grandparents looking to make a sizable contribution and avoid paying gift taxes, can front-load 5 years’ worth of contributions in one year for a maximum of $80,000 (or $160,000 if married filing jointly). One should keep in mind that this will prevent you from making contributions in the following years until after the 5-year period has elapsed.
  3. There are no required minimum distributions from 529 plan accounts for either the owner or successor.

The Old Rules

Part of FAFSA application process requires disclosure of assets and income from parents and the student. Below is a chart summarizing how financial aid is determined on an annual basis.

From this chart, we can conclude that grandparent-owned 529 plans do not have to be disclosed during this process. However, the top-right shows that up to 50% of a student’s income can be eligible as a resource (or family contribution) to cover education costs. Meaning that if a distribution were to be made from a grandparent-owned 529 and used to cover a grandchild’s education costs, it would have to be reported as student’s income on the FAFSA, which can severely impact the amount of aid a student may be eligible for.

The New Rule

The new FAFSA application, which will take effect for 2024-2025 school year, will no longer require a student to report distributions from a grandparent-owned 529 plan as support. Student income will instead be disclosed purely from tax return data. Going forward, grandparents should be able to contribute to education costs without the fear of compromising the financial aid process.


Planning for college can be a complex process. The use of 529 plans and completing the FAFSA application annually are highly recommended strategies. With these new changes coming, the planning process will be a bit simpler, though there are other financial aid traps to be on the lookout for that are still in place. Consulting with a fee-only financial advisor can set you on the best path to cover your grandchild or child’s needs.

Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.