Grandparent-Owned 529s Get a Boost

A long-awaited revamp of the Free Application for Federal Student Aid (FAFSA)—the form that determines financial aid for college students—offers an important win for families: 529 accounts owned by someone other than the beneficiary's parent will no longer affect financial aid eligibility.

"Distributions from these 529s were formerly treated as student income, which could reduce need-based aid," says Chris Kawashima, CFP^®, a senior research analyst at the Schwab Center for Financial Research. "But thanks to the FAFSA changes, they are no longer considered in the application process."

The change could be especially beneficial for grandparents and other family members who live in one of the more than 30 states, plus Washington, D.C., that offer either a tax credit or a tax deduction for contributions to their state-sponsored 529 plans. (Nine states—Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania—offer residents a tax benefit for contributions to any state's 529 plan.¹)

Individuals can also use 529s as a wealth-transfer vehicle. "Under current law, you can gift up to $18,000 per beneficiary per year to a 529 without dipping into your lifetime gift tax exclusion amount of up to $13.61 million in 2024," Chris says. What's more, 529s have a special provision that allows you to contribute five years' worth of gifts in a single year if you treat them as happening over five consecutive years for tax purposes. That means a married couple could contribute up to $180,000 in 2024 to any number of eligible family members—though they won't be able to make additional contributions to those accounts for another five years.

"This approach might seem excessive, but when you consider the growth potential, supercharging a 529 allows you to create a college-savings fund that could conceivably span generations—assuming your plan allows you to change the beneficiary and name a successor account owner," Chris says. "Of course, it's possible lawmakers could limit the tax advantages of such contributions in the future, but for now it's a way to support a child's, grandchild's, or even great-grandchild's educational goals."

That said, it's important to note that 529 distributions are still a factor on the College Scholarship Service (CSS) Profile, which is used by many private universities and some public institutions. "If a student is applying for financial aid from one of those participating colleges, any 529 funds benefiting them for the school year must be reported on their CSS Profile," Chris says. "That doesn't mean you shouldn't contribute—just be aware of how your 529 funds could ultimately affect the student's financial aid."