Grandparent 529 Plans

Piggy Bank

529 plans are a popular and effective way to save for education-related expenses, but historically, one potential drawback of grandparent 529 plans has been that they can affect financial aid eligibility for the beneficiary. However, thanks to upcoming changes to the Free Application for Federal Student Aid (FAFSA), distributions from a grandparent’s 529 plan will no longer count as income for the student in the subsequent year of applying for financial aid.  You can build an educational legacy for your grandchild while taking advantage of tax and estate planning benefits. 

Because of pending changes to the FAFSA, students will no longer have to disclose cash support. That means effective for the 2024–2025 school year, grandparent-owned 529 accounts will no longer impact a student’s eligibility to receive needs-based financial aid.

Changes to the Existing Rule

As alluded to earlier, for families applying for aid it is not required to disclose grandparent-owned 529 account assets on the FAFSA; however, they are required to disclose any cash support the student receives. So, if distributions are taken from grandparent-owned accounts and used for education expenses, the student is expected to show the distribution as income on future FAFSAs. This has traditionally been a large drawback of grandparent-owned 529 plans, since untaxed student income can reduce aid eligibility by as much as 50% of the amount of the cash support, which can have a large impact on needs-based aid eligibility – a $10,000 distribution to help your grandchild pay for college could reduce the aid eligibility by $5,000! Meanwhile, parent-owned 529 plans, which are disclosed upfront on the FAFSA, can only reduce aid eligibility by a maximum of 5.64% of the account value, which has minimal effect and is no more than any other nonqualified asset. 

Thankfully that is changing and effective for the 2024–2025 academic year, the new FAFSA questionnaire will no longer require students to manually disclose cash support.  Going forward, the only source of reported student income will be automatically retrieved from federal income tax return data.  Grandparents (and any other family members for that matter) can finally contribute significantly to the cost of their grandchildren’s education without impacting any needs-based financial aid eligibility.

A student’s FAFSA includes income and tax information from the prior-prior year, so the 2023-24 FAFSA will include information from 2021 federal income tax returns.  This means grandparents can start taking advantage of the new rules in 2023 and a grandchild will not have to report any 2021 distributions.

Please be aware that the FAFSA is not the only financial aid tool used by some colleges and universities, and grandparent 529 plans will still be considered on the CSS Profile, which is an additional financial aid form used by 200 or so private institutions to award their aid.  It is certainly possible that the FAFSA change could cause some colleges and universities to employ other means to collect information to use in their award determinations.

Benefits of 529 Plans for Grandparents

At their core, the major benefit of 529 plans is for tax-deferred investment growth and tax-free distributions (when used to pay for qualified education expenses) and are often an essential part of an estate plan.  Consider that for many grandparents they are in their peak earning years or may have already retired and thinking about their financial legacy, putting them in a great position to enjoy all the benefits of 529 accounts.

  • Pennsylvania residents, along with a majority of states, may claim a state income tax deduction/credit for contributions to a 529 plan.
  • Contributions to 529 plans are completed gifts and removed from the value of your taxable estate, but you retain control of the assets.
  • No concern of GST tax if contributions are at or below the annual gift tax exclusion amount (though the GST tax exemption amount is the same as the lifetime gift tax exemption of nearly $13 million in 2023).
  • You can transfer an even larger amount with the option to superfund a 529 plan by electing to spread a lump-sum contribution over a five year period.  So, at the 2023 amounts, you can make a contribution amount between $17,000 and five times the annual exclusion, $85,000, to be made in a single year without gift tax ($170,000 for joint filers). 
  • Access to tax-deferral with no time, age or income limits and with no required minimum distribution from 529 accounts for the owner or successor owner upon inheritance.
  • The accounts are flexible and the beneficiary can be updated if he/she decides not to attend college or does not use all of the funds.  Account owners can also be changed. 


With all of the benefits of 529 plans, now is a great time to set up a 529 plan to accumulate assets for your grandchildren and not worry about hurting their financial aid. While it is possible for the rules to change again, based on current information 529 plans are even more attractive for grandparent to own than before and in general with education, the more you save the better prepared your family will be for whatever the current circumstances are at the time. In many cases, it will be advantageous for financial aid purposes for grandparents to set up Section 529 plans, although we caution our clients that the Pennsylvania 529 plan is the only Section 529 plan not subject to Pennsylvania inheritance tax.

Please do not hesitate to contact us at or at (412) 419-1005 (voice or text) if you have any questions on this topic.

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