More grandparents are using 529 plans to help grandkids pay for college — and one FAFSA rule change made the strategy even more attractive

More than half of Americans are still in the dark about the tax-advantaged accounts. According to a 2025 Edward Jones survey, 52% of Americans said they were unfamiliar with 529 plans, while only 14% said they currently use one or plan to use one for education savings.

That lack of awareness could be leaving thousands of dollars on the table for families who could benefit from tax-free growth, potential state tax breaks and a simple way to help fund a child’s education.

A major advantage for grandparents

A 529 plan has long been one of the most powerful college savings tools available to families.

The accounts allow investments to grow tax-free and withdrawals used for qualified education expenses are generally exempt from federal income taxes.

But for years, there was a costly catch hidden in the financial aid system.

Under the old Free Application for Federal Student Aid (FAFSA) rules, withdrawals from a grandparent-owned 529 plan were counted as untaxed income to the student. That could trigger a painful reduction in need-based financial aid eligibility. In some cases, a $10,000 withdrawal from a grandparent’s 529 account could slash a student’s financial aid package by as much as $5,000.

That’s no longer the case.

The FAFSA Simplification Act changed the rules; starting with the redesigned FAFSA introduced for the 2024-25 school year, distributions from grandparent-owned 529 plans are no longer reported as student income.

The new FAFSA relies heavily on information pulled directly from federal tax returns and has eliminated questions that previously captured many forms of financial support from relatives.

The result? Grandparents can now tap their 529 savings to help pay for college without reducing a grandchild’s eligibility for federal financial aid through FAFSA.

The change has effectively revived what’s often called the “grandparent loophole” — a strategy that allows grandparents to contribute toward education costs while avoiding the financial aid penalties that once discouraged them from doing so.

There is one important caveat: Not every college relies solely on FAFSA. More than 200 private colleges and universities use the CSS Profile to determine eligibility for institutional aid, and those schools may still consider grandparent-owned 529 plans when evaluating a family’s finances.

Still, for the millions of students who rely on FAFSA to qualify for federal aid, the rule change removed one of the biggest drawbacks to grandparent-funded college savings and turned 529 plans into an even more valuable tool for helping the next generation pay for higher education.

What grandparents and families need to know before contributing

While the FAFSA changes have made grandparent-owned 529 plans more appealing, there are still some important details to understand before contributing to a grandchild’s 529 plan:

Gift tax limits still apply. In 2026, individuals can give up to $19,000 per recipient annually without triggering federal gift tax reporting requirements. Married couples can give up to $38,000 per recipient, according to the IRS.

Larger gifts may need to be reported. Gifts above the annual exclusion must be reported to the IRS and count against the donor’s lifetime gift and estate tax exemption. In 2026, that exemption rises to $15 million for individuals and $30 million for married couples. Federal gift tax generally applies only after those lifetime limits are exhausted.