Understanding the New 529 “Grandparent Loophole”

Recent changes to the federal financial aid process have created a new planning opportunity for grandparents who want to help support a grandchild’s college education. For years, distributions from grandparent-owned 529 accounts were treated as student income on the FAFSA (Free Application for Federal Student Aid), which could reduce a student’s eligibility for need-based aid.

Beginning with the 2024–2025 school year, students will no longer be required to report distributions from grandparent (or any non-parental) 529 accounts on the FAFSA. As a result, those distributions will no longer affect the student’s aid eligibility. This update simplifies the process for families and removes a longstanding barrier to using grandparent-owned 529 plans more strategically.

Understanding the FAFSA Change

This update is part of the FAFSA Simplification Act, enacted through the Consolidated Appropriations Act of 2021. One of the key revisions is the removal of questions on the FAFSA form related to “cash support” or financial contributions from non-parent sources, including grandparent-owned 529 plans. Previously, distributions from these accounts were classified as untaxed income to the student—a factor that could significantly reduce the student’s aid eligibility. To avoid this, some families delayed using grandparent-owned 529 funds until the latter years of college or pursued alternative ownership structures.

Under the new rules, these distributions are no longer reported on FAFSA and do not affect the student’s financial aid package. The process is now simpler and more flexible, allowing grandparents to use their 529 funds earlier in a student’s education without concern for unintended financial aid consequences.

How Grand Wealth Helps Clients Navigate These Changes

At Grand Wealth Management, we work with many clients who use 529 plans as part of a long-term strategy to support the next generation’s education. The recent FAFSA update can make these accounts even more appealing for grandparents that want to help provide for a grandchild’s education. We work closely with clients to ensure they are well positioned to take advantage of this opportunity by:

• Projecting education costs and contributions needed to partially or fully fund those costs

• Tracking contributions, distributions, and account balances across multiple plans or beneficiaries

• Managing investments and adjusting allocations for 529 accounts over time as children get closer to college age

• Coordinating direct payments to educational institutions or facilitating reimbursements to parents and students

• Providing guidance regarding IRS rules for qualified expenses

• Integrating 529 planning into broader estate, gifting, and retirement strategies

By overseeing both the big picture and the details, we help reduce the administrative burden on clients and ensure their generosity is implemented tax-efficiently and in accordance with their goals. We also stay current on regulatory changes like the FAFSA update, so clients can make informed decisions with confidence. Whether you’re already using a 529 account or considering opening one, we can help you assess how these changes fit into your broader financial picture. Learn more about Grand Wealth Management’s approach to education planning.

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_{Disclosure:
The opinions expressed herein are those of Grand Wealth Management (“GWM”) and are subject to change without notice. This material is not financial advice or an offer to sell any product. This article is for informational purposes only and does not constitute investment, legal or tax advice and should not be used as a substitute for the advice of a professional legal or tax advisor. GWM reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This is not a recommendation to buy or sell a particular security. Past performance does not indicate future results. GWM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about GWM including our investment strategies, fees and objectives can be found in our Form ADV Part 2 and Form CRS, which are available upon request.}