Grandparent 529 Plans and the FAFSA

For years, college planning advisors warned families about a specific, counterintuitive problem: if a grandparent had saved money in a 529 account for their grandchild, using that money to pay tuition could actually cost the student financial aid.

The logic was painful. The grandparent's 529 assets weren't counted on the FAFSA — which was fine. But when the grandparent made a distribution to help pay tuition, that money showed up as untaxed income to the student. Under the old formula, untaxed student income was assessed at up to 50%. A $10,000 distribution from grandma's 529 could reduce the student's financial aid eligibility by $5,000.¹

Families who understood this worked around it by timing distributions carefully — waiting until the student's second semester of junior year, so the income appeared in the base year for their last FAFSA application, not earlier ones. It was a workaround, not a solution.

The FAFSA Simplification Act eliminated this problem entirely.

What Changed

Under the 2026-27 FAFSA, distributions from grandparent-owned (and other non-parental) 529 plans are no longer reported as untaxed student income.¹ Combined with the fact that grandparent 529 assets were never reported on the FAFSA in the first place, the result is straightforward: money saved by grandparents in a 529 plan is now completely invisible to the federal financial aid formula.

This is a meaningful change for families who have been sitting on savings — or avoiding saving — because of this rule.

To be clear about the full picture: parent-owned 529 plans still appear on the FAFSA and are assessed at up to 5.64% of their value each year against the Student Aid Index. A parent-owned 529 with $50,000 in it reduces financial aid eligibility by up to $2,820 annually.² Grandparent 529s now carry no such penalty.

50% — The maximum rate at which grandparent 529 distributions used to be assessed against a student's financial aid eligibility under the old FAFSA formula. That assessment is now eliminated under the FAFSA Simplification Act.^{[^1]}

The One Exception That Matters

The federal FAFSA formula no longer counts grandparent 529 distributions. But approximately 200 private colleges and universities require an additional form called the CSS Profile to award their own institutional grant aid.²

The CSS Profile is not subject to the FAFSA Simplification Act. Private colleges set their own methodology for institutional aid, and many of them ask about grandparent contributions and assets on the CSS Profile. If your student is applying to or attending a college that uses the CSS Profile — typically elite private schools — the grandparent 529 may still affect institutional aid eligibility, even if it has no impact on federal aid.

If your student is at a CSS Profile school, contact the financial aid office directly and ask how they treat grandparent 529 distributions in their institutional aid calculations. Don't assume the federal FAFSA rule change applies to your school's own grant dollars.

How Families Should Think About This

For families at non-CSS-Profile schools — or where institutional aid is already maxed out — the calculation is now simple: grandparent 529s are the most FAFSA-friendly college savings vehicle available. Every dollar in a grandparent-owned account stays invisible, and distributions to pay tuition don't trigger any income assessment.

For grandparents who want to contribute to a student's education, the 2026 annual gift tax exclusion is $19,000 per beneficiary. Married grandparents can contribute up to $38,000 per grandchild per year without gift tax implications.³ Contributions can go directly into a new or existing grandparent-owned 529 plan in the grandchild's name.

One additional option for grandparents who prefer not to manage a 529: direct payments to colleges for tuition (not room and board) are excluded from gift tax entirely, with no dollar limit. This is a separate provision from the 529 rules.

For families where the parent-owned 529 is already growing and the student is close to college age, our guide on 529 plan college savings walks through when a 529 helps and when it can actually cost more than it's worth in lost aid.

If grandparents want to contribute now but you're unsure about CSS Profile implications, have them open a grandparent-owned 529 and hold the funds — distributing in the student's junior and senior years (when no more FAFSAs will be filed, or only one remains) minimizes any institutional aid risk at CSS Profile schools.

What to Do Right Now

If your family has grandparents who have been hesitant to contribute because of the old income rule, now is the time to revisit that conversation. The rule that made their savings a liability is gone.

Before acting:

• Confirm whether your student's colleges use the CSS Profile (check each school's financial aid page or use collegeboard.org/css-profile).
• If any schools use the CSS Profile, ask their financial aid offices how they treat non-parental 529 distributions.
• Review your Student Aid Index on your FAFSA to understand how your current family finances are being assessed.

For a full comparison of how the FAFSA and CSS Profile treat different assets, see our FAFSA vs. CSS Profile guide. And if you have questions about the financial aid appeal process — relevant if you think your current aid offer doesn't reflect your family's actual situation — our step-by-step FAFSA guide walks through the full process.

---

Footnotes

1. Saving for College. (2025). New FAFSA Removes Roadblocks for Grandparent 529 Plans. SavingForCollege.com. https://www.savingforcollege.com/article/new-fafsa-removes-roadblocks-for-grandparent-529-plans ↩ ↩²

2. Kiplinger. (2026). Use the 529 Grandparent Loophole to Maximize College Savings. Kiplinger. https://www.kiplinger.com/personal-finance/college/use-the-529-grandparent-loophole-to-maximize-college-savings ↩ ↩²

3. Internal Revenue Service. (2026). Frequently Asked Questions on Gift Taxes. IRS.gov. https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes ↩