How New Changes Make Grandparent-Owned 529 Plans a Game-Changer

For many families, paying for college is a significant concern, and financial aid often bridges the gap between affordability and opportunity. Recent updates to federal financial aid rules have made it easier for grandparents to help fund their grandchildren’s education without jeopardizing financial aid eligibility. Grandparent-owned 529 plans, already a highly effective college savings tool, now come with an added benefit: distributions from these accounts no longer impact a student’s financial aid. 

This change opens new doors for families planning for college. Discover how grandparent-owned 529 plans work, what’s new with financial aid rules, and how to maximize savings while protecting aid eligibility.

What Makes 529 Plans So Valuable for College Savings?

529 plans have always been a popular choice for families who want to save for education expenses. These accounts allow savings to grow tax-free, and withdrawals are also tax-free when used for eligible education costs, including tuition, room and board, and books. Grandparents often turn to 529 plans because they offer control over the account, flexibility in how funds are used, and significant tax advantages.

In addition to covering traditional college expenses, recent updates to 529 plans have expanded their uses. Today, families can use funds for apprenticeship programs, continuing education, and even repaying student loans. Starting in 2024, unused funds in a 529 plan can also be rolled over into a Roth IRA, offering even more flexibility. These features make 529 plans a versatile and forward-thinking option for funding education.

What Changed for Grandparent-Owned 529 Plans?

Under the old financial aid rules, grandparent-owned 529 plans presented a tricky dilemma. While the assets in these accounts didn’t need to be reported on the FAFSA, any distributions made to the student were counted as untaxed income. This could reduce financial aid eligibility by up to 50% of the distribution amount. For many families, this penalty made using grandparent-owned 529 plans a less appealing option, even though they offered other benefits.

The 2024-25 FAFSA form introduces a streamlined approach to determining financial aid. The new formula, known as the Student Aid Index, eliminates questions about grandparent contributions.
Now, distributions from grandparent-owned 529 plans are not factored into financial aid calculations, effectively removing the penalty that once existed. This change has been described as a loophole, but it’s more accurately seen as a long-overdue update that simplifies the process for families.

Why Does This Matter for Middle-Income Families?

Families in the middle-income bracket stand to gain the most from this new approach. Previously, these families often faced difficult decisions about how to save for college without unintentionally reducing their aid eligibility. The updated FAFSA rules allow grandparents to contribute to their grandchildren’s education without worrying about negative consequences.

This shift in policy makes it easier for grandparents to step in and provide meaningful financial support. It also opens the door for more families to explore 529 plans as a primary savings vehicle, knowing that the funds can be used strategically to complement other forms of financial aid.

What Should Families Consider Before Using a Grandparent-Owned 529 Plan?

While the new rules make grandparent-owned 529 plans more appealing, families should approach this opportunity thoughtfully. Open communication is crucial to ensure that everyone is aligned on the best way to use these funds. For instance, grandparents need to balance their desire to help with their own financial planning needs, including retirement.

Another consideration is the ownership of the account. Grandparent-owned 529 plans remain the grandparents’ asset, which can have implications for Medicaid eligibility or estate planning.
A skilled estate planning attorney team can help with these potential complexities and ensure this process is done correctly.

It’s also worth noting that some private colleges use a different financial aid form, the CSS Profile, which may still take grandparent contributions into account. Families should be mindful of this if their student is applying to institutions that require the CSS Profile.

How Does This Affect Long-Term Planning?

Grandparent-owned 529 plans aren’t just about funding college; they’re also an opportunity to pass down financial security and support future generations. By leveraging the updated FAFSA rules, grandparents can play a pivotal role in reducing the burden of student debt. This, in turn, helps their grandchildren enter adulthood with greater financial stability.

The ability to roll unused 529 funds into a Roth IRA is another compelling reason to consider these plans. If a grandchild doesn’t need all the funds for college, the account owner can redirect those savings toward retirement. This added flexibility makes 529 plans a smart choice for families looking to maximize their financial resources.

What Makes This a Loophole and How Can Families Use It?

Calling this change a loophole highlights how it sidesteps the penalties that previously existed for using grandparent-owned 529 plans. However, it’s more accurately a reform that aligns with the goal of making college more accessible. Families can now use grandparent contributions strategically, timing distributions in a way that maximizes financial aid eligibility while still covering education costs.

This opportunity doesn’t mean families should rush into decisions without careful planning.
It’s important to evaluate how a grandparent-owned 529 plan fits into the broader financial picture.
For some families, it may make sense for grandparents to contribute directly to a parent-owned 529 plan instead. Every situation is unique, and the right approach depends on individual goals and circumstances, which is why it is important to work with an attorney skilled in this area.

How Can Families Get Started with Grandparent-Owned 529 Plans?

The first step is to open a 529 plan if one isn’t already in place. Grandparents who already own a 529 plan should review their account and consider how the new FAFSA rules might change their strategy. It’s also a good time to revisit family financial goals and ensure everyone is on the same page.

Contact Our Estate Planning Attorneys Today

The recent changes to FAFSA rules make grandparent-owned 529 plans more attractive than ever, but they also highlight the importance of careful planning. At Estate Planning & Elder Law Services, we understand that every family’s financial situation is unique. Our team is here to help you navigate the complexities of planning for your family’s future.

Contact us today to schedule a consultation. We’ll work with you to ensure your family is prepared for the future while making the most of every opportunity available.