529 plans remain a powerful tool for saving for college, but the recent FAFSA Simplification Act has introduced significant changes that affect how these accounts interact with financial aid. Here’s what you need to know to make the most of your savings while minimizing the impact on financial aid eligibility.
Grandparent-Owned 529 Plans and the FAFSA
The FAFSA Simplification Act has removed many complexities from the financial aid process, including questions that previously required students to report cash gifts or distributions from grandparent-owned 529 plans.
Key Updates:
- Grandparent Distributions No Longer Penalized
Since the 2024-25 FAFSA, students are not required to report distributions from a grandparent-owned 529 plan as untaxed student income. This eliminates the prior penalty, which reduced financial aid eligibility by up to 50% of the distribution amount. - Income Calculations Streamlined
The FAFSA now uses tax return data imported directly from the IRS, and non-taxable cash support from sources like grandparent 529 accounts is no longer included in financial aid calculations for most colleges.
Exception: Over 200 private institutions that use the CSS Profile will still consider grandparent-held 529 assets and distributions when awarding their own financial aid.
Strategies for Using Grandparent 529 Funds
The changes mean grandparents can now fund a child’s education without the need for complex timing strategies previously required to avoid financial aid penalties.
- Before the Changes: Grandparent 529 funds were best used in a student’s later college years to avoid impacting earlier FAFSA filings.
- Now: Grandparents can contribute anytime without fear of reducing aid eligibility—provided the student is applying to FAFSA-only schools.
Gift Tax Implications
Contributions to 529 plans are subject to annual gift tax limits. For 2025, these are $19,000 per person ($38,000 for married couples).
Rollover Options for Unused 529 Funds
If a grandchild doesn’t use all the 529 funds, there’s a new opportunity to roll over unused amounts into a Roth IRA, as long as certain conditions are met:
- The 529 account must have been open for at least 15 years.
- Contributions made within the past five years are ineligible for rollover.
- Rollovers are subject to annual Roth IRA contribution limits and lifetime caps.
For 2025, Roth IRA contribution limits are $7,000 for those under 50 and $8,000 for those 50 and older.
Implications for CSS Profile Schools
While the FAFSA has simplified the process, families applying to selective colleges using the CSS Profile should remain cautious. The Profile considers grandparent-held 529 plans and gifts to parents as part of its broader financial assessment.
Gifting Funds Directly to Parents
Gifting remains a viable strategy. Grandparents can gift up to the annual tax-free limit to parents, who can then pay college expenses. Timing is critical: gifts made after FAFSA is filed won’t impact that year’s aid eligibility but may still affect the CSS Profile.
Bottom Line:
Recent changes make 529 plans, especially those owned by grandparents, a more versatile tool for funding college without compromising financial aid eligibility. Be mindful of the differences between FAFSA and CSS Profile requirements, and consult a financial advisor to maximize your savings and minimize potential tax implications.
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