Key takeaways

• 529 plans owned by a grandparent are no longer counted on FAFSA forms under updated federal rules.

• Qualified 529 withdrawals from grandparents generally do not reduce a student’s federal aid eligibility.

• Families should weigh tax benefits, gift-tax limits, and long-term education funding needs when contributing.

The so-called 529 “grandparent loophole” occurs when funds within a grandparent-owned 529 investment account are sheltered from being included in the beneficiary’s federal financial-aid calculations.

Grandparents are the owners of the 529 plan with a grandchild as the beneficiary, and the student receives an added benefit of those funds not being counted for the Federal Application for Student Financial Aid (FAFSA) form.

The majority (87.3%) of first-time college students use at least one form of financial aid, and students who file the FAFSA in a given year represent 61% of enrolled college students for that fall.¹ For the 2026-2027 filing year, more than 5 million FAFSA forms were submitted.² 

What is the 529 grandparent loophole?

The FAFSA is a form hosted by the Department of Education that assesses how much federal financial aid a student can qualify for by understanding how much income they have access to.

One change made under the FAFSA Simplification Act — which took effect beginning in the 2024-2025 FAFSA application period — was that students no longer were no longer being asked about contributions received from a grandparent. As a result, grandparent-owned 529 plans do not affect FAFSA calculations.³

Why the FAFSA change matters for grandparents

Information from a student’s FAFSA form is used to calculate an individual Student Aid Index (SAI), taking into account the financial resources of students and their parents. The SAI ranges from -1500 to 999999, with a lower number indicating a higher financial need.⁴

Grandparents’ income and assets were part of income calculations before the new law streamlined the FAFSA application process and removed the requirement, creating the 529 grandparent loophole.

More than 1 in 5 American grandparents contribute to savings or college funds for their grandchildren, with 5% of those contributors putting money specifically toward school tuition.⁵ Leveraging a 529 plan owned by a grandparent to pay for college could further maximize any aid that’s offered.

Grandparent-owned vs. parent-owned 529 plans

There are many factors in whether to decide if contributions should go into a parent-owned or grandparent-owned 529 account.

529 accounts owned by parents are assessed at a maximum of 5.64% of value in the FAFSA’s SAI determination process. Other key differences include:

Benefits of using a 529 plan for grandchildren

The advantages of a 529 plan itself center around taxes. 529 plans offer several education-saving tax advantages: They allow for tax-free potential growth, and money withdrawn from the accounts is exempt from federal and state taxes when used for qualifying expenses.

Read more: What can 529 funds be used for? Get a Sense Check

Grandparents can enjoy state tax benefits by deducting 529 contributions on their annual return, depending on where they reside and which 529 plan they are enrolled in. Only certain states offer tax benefits (and for some, only up to a certain amount), so it’s best to check with the individual 529 plan and/or a tax professional, too.

The 529 grandparent loophole is an additional perk, as families can set aside money to pay for college in a tax-advantaged way without impacting their own financial aid qualifications.

For grandparents specifically, 529 contributions can be part of a wider financial plan to allocate money to family and heirs before death and to lengthen the time horizon for the money’s potential growth.

Disadvantages of grandparents owning 529 plans

Grandparents may want to own a 529 plan for their grandchild and benefit from this financial-aid loophole, though families should consider if it’s the best overall approach for school costs.

Using the 529 money effectively is one factor: If the grandchild is not able to use any or all of the funds for educational expenses, the grandparent may decide to take out the money as a nonqualified 529 withdrawal.

Under those circumstances, you lose out on the tax advantages of a 529 plan. With a nonqualified withdrawal, the funds can be used for any reason, though they are then subject to income taxes and an additional penalty of 10% on the earnings (not contributions).

Read more: 529 plan myths: 6 facts that could change how you save

As the owner of the 529 plan, the grandparent will also need to be diligent around account maintenance. This includes staying updated on account balances, gift contributions, investment choices, and if the plan charges specific fees (such as maintenance fees), along with making changes during the life of the account.

Grandparents may not have a full financial picture of how the family is paying for their grandchild’s education, which could lead to them contributing more than needed into the 529.

How much can grandparents contribute to a 529 plan?

If families are looking to use the loophole and house more contributions in a grandparent-owned 529, they should also pay attention to the annual gift tax exclusion. The gift tax limit for 2026 is $19,000 per recipient, which means that a person can gift up to that amount before the federal gift tax applies.

A single grandparent would be able to gift up to $19,000 without filing a gift tax return and possibly pay more in taxes. Married grandparents who file jointly can gift up to double the amount ($38,000) in a single year without the gift tax coming into play. Those amounts would then apply separately for others contributing to the grandparent-owned 529, like a parent or other relative.

“Superfunding” a 529 is another option to make contributions. Grandparents who have enough financial liquidity to make additional contributions could front-load a 529 by making up to five years’ worth of gifts at once. This would then maximize the compounding power of the 529’s potential tax-free growth.

Read more: What is a 529 plan? How it works, potential benefits, & key rules

When does the loophole not apply?

The 529 grandparent loophole covers money that does not need to be shared on the FAFSA form, which qualifies students for federal financial aid. However, schools may have their own forms or processes for determining other types of financial aid that can be issued outside of government sources.

More than 250 colleges and universities use the CSS Profile form in their financial-aid process, and the loophole for grandparent-owned 529 accounts may not apply if they ask for more detailed financial questions about the applicant’s family.⁶ It’s best to check with each potential school to understand how they decide on financial aid packages and which type of income need to be disclosed.

How families can use the 529 grandparent loophole wisely

The grandparent loophole can be helpful, though it should not be the only reason to open a 529. Be mindful of how much grandparents are contributing over time. Depending on their life situation, grandparents may need to adjust their own financial goals to prioritize retirement savings and healthcare spending needs.

Having honest, ongoing conversations about money across the generations (student, parent, grandparent) can make paying for college a shared experience that’s more financially transparent.

What happens if the 529 is overfunded?

For families who have contributed to a 529 plan, it’s important to strike a balance between the amount of money being put into the account and an estimate of how much of those funds will be used.

Whether the account is a grandparent-owned or parent-owned 529 plan, contributions and potential investment earnings may result in a balance that exceeds the amount needed for qualified education expenses. Families have several options for an overfunded 529 account:

• Roll over up to $35,000 into a Roth IRA: Using a Roth IRA for 529 unused funds can be one way to keep a nest egg allocated as savings if priorities shift away from education. Make sure to follow the strict eligibility rules, including a 5-year wait, annual limits, and a $35,000 lifetime rollover cap.

• Change the beneficiary to another family member: If a grandparent has multiple grandchildren, they can retain the compounding power of existing 529 contributions and change the beneficiary on the 529 plan to a different grandchild. The beneficiary’s age is less of a factor now that K-12 costs and vocational courses are allowed as 529 eligible expenses.

• Make yourself the beneficiary: Depending on the grandparent’s lifestyle and financial needs, they could switch the beneficiary to themselves and use the 529 funds for costs like continuing education coursework or qualified student loan payments.

• Take a non-qualified withdrawal: You’d lose out on tax benefits and need to pay income tax and a penalty, though grandparents would be able to use the money for any purpose they choose.

Bottom line

The 529 grandparent loophole can be a valuable tool for students and families looking to get the most power from their financial aid and college savings dollars. Beyond potential tax-free growth and withdrawals for qualifying expenses, the ability to still be eligible for student aid could make a difference for the next school year and beyond.