A Grandparent’s Guide to 529 Plans & the New FAFSA Rule

With the new FAFSA Rule, it’s now easier to support your grandchild’s education.

• What’s Changed?
  

  
  Previously, if a grandparent used a 529 plan to help with college costs, those withdrawals were counted as student income on the FAFSA, potentially reducing aid. Starting with the 2024-2025 academic year, this is no longer the case. Grandparent-owned 529 distributions are not reported on the FAFSA, making it easier to support your grandchild without affecting their aid.
  
  Parent-owned 529 plans are still considered parental assets for financial aid purposes, which could have a small effect on financial aid. However, when money from this account is used for qualified education expenses, it’s not counted as income for the student. This rule remains unchanged.

• What is a 529 Plan?
  
  A 529 plan is a tax-advantaged savings account for education expenses like tuition, books, and housing. Withdrawals for qualified expenses are tax-free, and many states offer tax credits for contributions.
  
  
  
• What is FAFSA?
  
  The Free Application for Federal Student Aid (FAFSA) is a form to apply for financial aid that determines a student’s eligibility for financial aid, including scholarships, grants, loans, and work-study programs.

A Quick Note About Private Colleges

Some private schools use the College Scholarship Service (CSS) Profile, which may treat grandparent 529 plans differently—possibly as assets or income. It’s a good idea to check with each college’s financial aid office for specific policies.

Benefits for Grandparents & Their Grandchildren

• More Financial Aid
  Students won’t be penalized for grandparent support.
  
  
• Greater Flexibility
  You can contribute to your grandchild’s education confidently at any time.
  
  
• Simpler Planning
  Grandparents no longer need to delay distributions until later college years.
  
  
  

Talk to Your Financial Advisor

If you own a 529 plan, talk to your Advisor about:

• When to Start Distributions
  With no FAFSA penalty, you may now use 529 funds earlier.
  
  
• Investment Strategy
  Depending on your grandchild’s age and when you plan to use the funds, your investment strategy may need adjusting.
  
  
• Contribution Planning
  If you’re contributing a large amount or using gift tax exclusions.
  
  

Your financial advisor can tailor a plan that aligns with your grandchild’s educational timeline and your financial goals.

This article was featured in the Summer 2025 edition of the Rising Dividend Report.

Read more articles from this issue here.


This has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.