How Grandparents Can Contribute to a 529 Plan Without Hurting Financial Aid
Your grandkids’ future is bright—and you want to keep it that way. But did you know that your well-meaning 529 plan contributions could accidentally lower their financial aid eligibility?
Let’s change that narrative.
With the right strategy, you can help pay for your grandchild’s college without sabotaging their FAFSA benefits. This guide unpacks the nuances, rules, and pro tips so your money works smarter, not harder—for their future.
🎓 First, What is a 529 Plan?
A 529 plan is a tax-advantaged savings account designed to help families save for education. Contributions grow tax-free, and withdrawals are also tax-free when used for qualified education expenses.
There are two types:
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College Savings Plans: Investment-based, similar to a Roth IRA.
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Prepaid Tuition Plans: Lock in tuition prices at today’s rates at participating schools.
For grandparents, the college savings version is usually the go-to option.
🧓 Grandparents and the 529 Plan: What’s the Big Deal?
Here’s the twist: while anyone can contribute to a 529 plan—including Grandma and Grandpa—how the money is owned and distributed affects financial aid calculations.
Key Players:
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Parent-owned 529: Counted as a parental asset on the FAFSA (up to 5.64% affects aid).
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Grandparent-owned 529: Not counted as an asset... but distributions count as untaxed student income!
And that’s where the potential problem lies...
Distributions from a grandparent-owned 529 plan can reduce financial aid by up to 50% of the withdrawn amount. Yikes.
But fear not—there’s a smart workaround.
💡 Workarounds to Help Without Hurting Financial Aid
Let’s dive into smart, FAFSA-friendly strategies.
1. Time Your Distributions Carefully
The FAFSA looks at income from the prior-prior year (PPY). For example, the 2025–26 FAFSA considers income from 2023.
➡️ Pro tip: Wait to use the 529 plan until after January 1 of the student’s sophomore year. By then, the FAFSA won’t care about that distribution.
Real-Life Example:
Grandpa Joe waits until Ella's junior year to tap into her 529. Since FAFSA no longer counts her income from the previous two years, her aid package stays untouched—and she gets that extra help.
2. Transfer Ownership of the 529 Plan to the Parents
Some states allow ownership changes—check your plan. If grandparents open a 529 and then transfer it to the parents, distributions are treated as parent-owned assets, not student income.
Caution: This can have state-specific tax implications and should be reviewed with a financial advisor.
3. Give Money to the Parents Instead
Instead of making distributions yourself, give a cash gift to the parents. They can then contribute to the student’s 529 or use the funds directly for education costs.
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In 2025, individuals can gift up to $18,000/year (or $36,000 for couples) per recipient without triggering the federal gift tax.
This keeps things tidy on the FAFSA while still boosting the grandchild’s financial well-being.
🧠 New FAFSA Changes = New Opportunities
The FAFSA Simplification Act, phased in through 2024–2025, changes everything for grandparents.
One of the biggest updates? Grandparent-owned 529 distributions are no longer counted as untaxed student income.
Cue the celebration music. 🎉
Starting with the 2024–2025 school year, your 529 contributions and distributions will no longer impact the student’s FAFSA at all—as long as you're not the custodial parent.
“This is a game-changer for families,” says Mark Kantrowitz, a leading financial aid expert. “Grandparents can now help pay for college without sabotaging aid eligibility.”
💰 Other Ways Grandparents Can Support College Costs
Even beyond the 529 plan, grandparents can pitch in through:
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Paying tuition directly to the college (not considered a gift for tax purposes!)
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Covering room, board, books, and fees after financial aid has been awarded
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Funding an ESA (Education Savings Account) or UTMA account—but be mindful of how these assets are treated in aid formulas
📊 The Numbers That Matter
Let’s break down how 529s affect aid:
529 Owner | FAFSA Asset | FAFSA Income (on distribution) | Aid Impact |
---|---|---|---|
Parent | Yes (5.64%) | No | Minimal |
Grandparent (pre-2024 FAFSA) | No | Yes (up to 50%) | High |
Grandparent (post-2024 FAFSA) | No | No | None! 🎯 |
🍿 Pop Culture Tie-In: The "Schitt's Creek" Strategy
Remember the Rose family from Schitt's Creek? When they lost everything, Alexis and David had no clue how to budget for the future. Imagine if Moira’s wealthy sister had started a 529 for them early on—those wigs and spa days could’ve been tuition checks instead!
The lesson? A little planning today makes for a smoother show tomorrow.
✅ Quick Checklist: How Grandparents Can Maximize 529 Contributions
✅ Open a 529 plan in your name OR contribute to a parent-owned one
✅ Use the new FAFSA rules to your advantage
✅ Consider gifting money to the parents if ownership transfer isn’t ideal
✅ Time distributions smartly for maximum aid
✅ Pay tuition directly for non-taxable contributions
✅ Talk to a financial planner to personalize your strategy
📣 Final Thoughts: Be a Legacy Builder, Not a Financial Hurdle
Your role as a grandparent is powerful. You have the opportunity to pass on more than money—you’re passing on freedom, choice, and future dreams.
And thanks to evolving FAFSA rules and savvy planning, you can now contribute generously without derailing aid eligibility.
Help your grandchild graduate with opportunity, not just a degree.
🔗 Suggested Reading
Ready to build your grandchild’s future like a pro?
🎓 Take the next step: Open or contribute to a 529 plan today and start watching your legacy grow—tax-free and aid-friendly!
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