Advisors' Corner

With a 529 plan, grandparents can help build an educational legacy for a child or grandchild while potentially benefiting from tax advantages and estate planning opportunities.

Best of all, changes to the FAFSA (Free Application for Federal Student Aid) that went into effect beginning with the 2024–2025 academic year have improved how grandparent-owned 529 plans are treated for federal financial aid purposes.

How Grandparent-Owned 529 Plans Were Previously Treated

Overall, 529 plans have historically had a relatively limited impact on financial aid eligibility.

Parent-owned 529 plan assets are reported on the FAFSA as parent assets, which may reduce aid eligibility by up to 5.64% of the account value.

Grandparent-owned 529 plans, however, were previously treated differently. While the assets themselves were not reported on the FAFSA, distributions from those plans were treated as untaxed student income under prior FAFSA rules.

Because student income can have a significant impact on financial aid calculations, this sometimes reduced a student’s aid eligibility.

For example, under prior FAFSA rules, a $10,000 distribution from a grandparent-owned 529 plan could potentially reduce a student’s financial aid eligibility by as much as $5,000.

What Changed Under the New FAFSA Rules?

Beginning with the simplified FAFSA introduced for the 2024–2025 academic year, qualified distributions from grandparent-owned 529 plans are generally no longer reported as untaxed student income on the FAFSA.

For many families, this removes one of the biggest concerns grandparents previously faced when helping save for college.

The updated FAFSA now pulls much of a student’s income information directly from federal tax return data through the FUTURE Act Direct Data Exchange (FA-DDX), which replaced the IRS Data Retrieval Tool.

As a result, certain types of cash support that previously had to be manually reported on the FAFSA are no longer treated the same way under the current federal aid formula.

Important Financial Aid Considerations

While FAFSA treatment has improved significantly, some private colleges use the CSS Profile in addition to the FAFSA when determining institutional financial aid.

Those schools may still evaluate grandparent-owned 529 plans differently, so families should continue reviewing financial aid policies carefully when building an education savings strategy.

Financial aid rules can also change over time, particularly for families planning many years into the future.

Tax Benefits for Grandparents

529 plans offer tax-deferred investment growth, and qualified withdrawals are generally tax-free when used for eligible education expenses.

Depending on your state and plan, additional state income tax deductions or credits may also be available. Many states offer state tax benefits for contributions made to their state-sponsored 529 plan.

2026 Contribution & Estate Planning Rules

For 2026:

• Individuals may contribute up to $19,000 per beneficiary annually without triggering federal gift tax filing requirements
• Married couples may contribute up to $38,000 jointly per beneficiary

Families may also use a strategy commonly known as “superfunding,” which allows up to five years’ worth of gifts to be contributed at one time:

• Up to $95,000 for individuals
• Up to $190,000 for married couples electing gift splitting

There is generally no annual federal contribution limit specific to 529 plans, although gift tax rules and state aggregate contribution limits may apply.

One additional advantage is that account owners typically retain control of the assets within the 529 plan, even after contributions are made.

More Than Traditional College

529 plans can also support more than traditional four-year colleges and universities.

Depending on eligibility requirements, qualified expenses may include:

• Trade and technical schools
• Vocational programs
• Registered apprenticeship programs
• Certain certification programs
• Books, supplies, computers, and some room and board expenses
• Up to $10,000 annually per beneficiary for eligible K–12 tuition expenses under current federal law
• Limited student loan repayment under current federal law

Recent law changes have also created Roth IRA rollover opportunities for certain unused 529 funds, subject to IRS eligibility requirements and lifetime limits.

Planning for the Future

Education planning can feel overwhelming, especially as college costs and financial aid rules continue to evolve. But understanding how today’s education savings options work can help families build greater flexibility for future goals.

Whether you’re a parent, grandparent, or family member looking to help, starting early and contributing consistently over time may make a meaningful difference.

Source: Saving for College — Grandparent-Owned 529 Accounts & the New FAFSA

Educational content only; USSFCU does not provide legal or tax advice. Consult a qualified professional for your situation.