New College 529 Plan Rules for Grandparents

In the past, distributions from a 529 plan owned by a grandparent were assessed at a higher percentage than if it was owned by the student or parent. 

The new FAFSA Simplification Act now says that these distributions don’t count as untaxed income and don’t negatively affect the student’s FAFSA application. 

Additionally, the grandparent-owned 529 is not counted as an asset by FAFSA and doesn’t affect financial aid calculations. 

Cash payments made by the grandparent towards tuition also now will not affect financial aid eligibility. 

For 2025, a grandparent could fund a 529 plan up to $19,000 without filing a gift tax return or a one-time deposit of $95,000 per child, total (as if it is for five years).  

*A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. Every state offers at least one 529 plan. Before buying a 529 plan, you should inquire about the particular plan and its fees and expenses. You should also consider that certain states offer tax benefits and fee savings to in-state residents. Whether a state tax deduction and/or application fee savings are available depends on your state of residence. For tax advice, consult your tax professional.  Non-qualifying distribution earnings prior to 2024 are taxable and subject to a 10% tax penalty.  Beginning in 2024, unused 529 plan funds may be rolled into a Roth IRA assuming the following conditions are met:  1) must have owned the 529 plan for 15 years, 2) can only convert funds that have been in the 529 plan for at least 5 years, 3) rollover amount cannot exceed $35,000 and 4) rollovers must be made to a beneficiaries Roth IRA.