Starting this year, grandparent-owned 529 savings accounts won't be counted toward a student's FAFSA eligibility.
By
Margaret Attridge
Writer
Margaret Attridge is a news reporter for BestColleges focusing on higher education news stories in California. She graduated from the University of Maryland, College Park in May 2022 with a BA in journalism and government and politics....
Published on February 13, 2023
Edited by
Darlene Earnest
Editor & Writer
Darlene Earnest is a copy editor for BestColleges. She has had an extensive editing career at several news organizations, including The Virginian-Pilot and The Atlanta Journal-Constitution. She also has completed programs for editors offered by the D...
By
Margaret Attridge
Writer
Margaret Attridge is a news reporter for BestColleges focusing on higher education news stories in California. She graduated from the University of Maryland, College Park in May 2022 with a BA in journalism and government and politics....
Edited by
Darlene Earnest
Editor & Writer
Darlene Earnest is a copy editor for BestColleges. She has had an extensive editing career at several news organizations, including The Virginian-Pilot and The Atlanta Journal-Constitution. She also has completed programs for editors offered by the D...
Published on February 13, 2023
Image Credit: warodom changyencham / Moment / Getty Images
- 529 savings plans are tax-advantaged investment accounts designed to encourage saving for future education expenses.
- Students have to report untaxed student income on their FAFSA forms when applying for financial aid.
- New FAFSA rules will not count funds from grandparent-owned 529 accounts as untaxed student income, increasing the student's eligibility for student aid.
Today, 529 savings plans are a popular way of saving money for college and offer many benefits to account owners. Anyone can open a 529 account for the student in their life. And thanks to new Free Application for Federal Student Aid (FAFSA) rules, grandparent-owned accounts will no longer factor into student aid eligibility.
What Are 529 Accounts?
These savings plans are tax-advantaged investment accounts designed to encourage saving for future education expenses. All 50 states and the District of Columbia sponsor at least one type of 529 plan with varying restrictions and tax benefits.
"Across the country, there are several 529 plans to choose from, and they offer a lot of savings options that really are appealing because of the combination of the tax advantages, the control that account owners have over the account, and the flexibility," said Rachel Biar, chair of the College Savings Plans Network and the assistant state treasurer for the Nebraska 529 College Savings Program.
All earnings from a 529 account are tax-free when used for qualified educational purposes including tuition, fees, and textbooks. Biar told BestColleges that many states also offer income tax deductions for 529 accounts.
"On top of getting the tax advantages on the earnings being tax-free, and the distributions coming out tax-free, [account owners] also get that in-state tax deduction if their state offers that, so it's really a nice combination for families to take advantage of," she said.
Grandparent Loophole
Previously, students reported any funding from a grandparent-owned 529 plan as untaxed student income on their FAFSA. Contributions from grandparents would count against the student's financial aid eligibility.
However, the new rules will not require students to report any cash funding they have gotten for college, including grandparent-owned 529 accounts, when applying for financial aid. This means that grandparent-owned 529 plans will not impact financial aid eligibility.
The new rules go into effect for the 2023-2024 school year, although grandparents hoping to help the students in their life save for college can start now since FAFSA considers the past two years of a student's income.
Biar says the rules change is a "nice advantage" for grandparent-owned accounts.
"Basically when a grandparent owns the account now, there will be no impact on the students on the financial aid form, which is really positive," she said.
Setting Up Your Plan
Biar says it is never too early or late to set up a 529 plan for a student. She recommends talking to family members about donating to a student's plan for special occasions as a way to build up savings.
"There's so much versatility of 529 plans, and they really can make a difference in building that flexibility into the college savings journey … I always think it's good for families to talk to grandparents about holidays [and] birthdays … It's really a nice time to put a gift of a 529 contribution into their account. Grandparents sometimes have a better ability to help save, and so definitely get the whole entire family involved."
Biar calls saving for college a "family affair" and says she has 529 accounts for her nieces and nephews.
"Having those conversations early and helping guide that student's path is a benefit to everyone, particularly the students as they enter their higher education career," she said. "Knowing that they have some savings that will help them is less stressful as they navigate the costs that come with college."
FAQs
April 11, 2024
One of those changes is known as the 'Grandparent Loophole', which now makes college payments made by grandparents exempt from the form. Previously, the FAFSA application counted grandparent contributions as untaxed student income under a 529 plan.
What is the loophole for 529 plans? ›
On the 2024-25 FAFSA, students are no longer required to report cash gifts from a grandparent or contributions from a grandparent-owned 529 savings plan. Because of this, grandparents can now use a 529 plan to fund a grandchild's education without impacting their financial aid eligibility.
What is the best way for grandparents to fund 529? ›
Almost all 529 plans accept gift contributions by check, and some 529 plans offer gifting platforms that allow friends and family to make secure electronic deposits. Some also accept Gift of College gift cards, which are available to purchase online or at over 3,000 retailers.
How much can a grandparent gift to a 529 plan? ›
Gift Tax. If you contribute more than $18,000 in one year to a 529 plan, your gift will be subject to the gift tax, and you'll have to foot the bill. This is in compliance with IRS rules on gift taxes that specify a limit of $18,000 per beneficiary in 2024.
Is the new FAFSA loophole lets grandparents help pay for college without affecting financial aid eligibility? ›
But now, thanks to a 2020 law that went into effect this year, those questions about money and income are gone. That means that at most schools, help from a grandparent will no longer count against you.
Can I do my own FAFSA without my parents? ›
You'll be considered provisionally independent. You will be able to skip questions about your parents on the FAFSA form and submit it without a parent signature.
What is the best college savings plan for grandchildren? ›
Option #1: Use a 529 college savings plan
While the grandparent can set up their own 529, they can also contribute to a 529 plan owned by a parent of the grandchild, Roberts says. Pros: Most 529 plans make it easy for account owners to invite others to contribute to them.
Is it better to have a 529 in parents or grandparents? ›
It is also fairly common for grandparents to own a 529 plan for the benefit of their grandchildren. A 529 plan is a great option to save money contributed from grandparents for the benefit of their grandchildren, it just might make more sense for the parents to own the plan.
Do rich people use 529 plans? ›
529s are funded with after-tax dollars, which means that over time the investments grow tax-free. These plans are attractive for wealthy families because they provide a way for a parent or grandparent to transfer much more money to a child than they would be able to without incurring gift taxes, Stokes says.
What is the 5 year rule for 529 plans? ›
However, special 529 rules allow you to use five years of annual exclusions at once for a tax-free gift of up to $85,000 (joint taxpayers may fund $170,000). Your $1 million dollar gift tax exemption may also be available for funding your 529 account.
Some financial professionals advise grandparents to contribute to a 529 plan as part of an estate planning strategy. In most cases, you have to consider the Generation Skipping Transfer Tax (GST) when leaving an inheritance to a grandchild.
What happens to 529 if child doesn't go to college? ›
Leave the account intact.
If your child is simply not sure about college or perhaps wants to delay applying, you can keep your 529 plan intact until the child does use it for qualified education expenses.
What happens if grandparents contribute to 529 plan? ›
If grandparents contribute to the parent's 529 college savings plan, the money is considered a parental asset when calculating the current SAI for federal financial aid. In that case, they count for up to 5.6% of assets versus 20% for a student asset, which is how they would be counted for a custodial account.
What are the changes in 529 plans in 2024? ›
As of January 1, 2024, when you discover you have extra money in your child's 529 plan, there is a fourth option to select from. You can transfer that cash to a Roth IRA. You can piggyback retirement savings onto your college savings. Of course, there are some basic rules you must abide by before you can do this.
What happens to grandparent 529 if grandparent dies? ›
Well, your estate will become the owner of the policy while your child/grandchild will remain the beneficiary of the policy. Your 529 account will not terminate; it will simply continue under a new account owner.
Can I use my grandparents income for FAFSA? ›
Cash support that the student receives from anybody other than the student's parents (as listed on the FAFSA) must be reported on the FAFSA as untaxed income to the student. Cash support includes not just money given to the student and loans, but also money paid to someone else on behalf of the student.
Do grandparents count for FAFSA? ›
Grandparents, foster parents, legal guardians, older brothers or sisters, widowed stepparents, and aunts and uncles aren't considered parents unless they've legally adopted you.
Are gifts from grandparents reported on FAFSA? ›
The FAFSA uses a two-year “look-back” period for income, so the 2024–2025 FAFSA will be based on the student's 2022 tax return. Thus, a grandparent gift or distribution in 2022 won't affect the 2024–2025 FAFSA, and the same treatment will apply to gifts and distributions in 2023 and later years.
Can a grandparent start a college fund for a grandchild? ›
There are a number of valuable ways that grandparents can use a 529 college savings plan to help with a grandchild's higher education goals. While the grandparent can set up their own 529, they can also contribute to a 529 plan owned by a parent of the grandchild, Roberts says.
