Grandparents Can Use 529 College Saver Plans for Grandkids Without Hurting Financial Aid

Tax-free 529 plans are a strong option for education savings, and they're about to get better for grandparents.

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Peter Butler
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529 Plan written on a blackboard next to a pile of money

529 education savings plans let money grow without taxes.

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Getting a higher education degree can lead to big benefits for graduates, but it can also come with an ever increasing price tag. The average college student pays $35,551 a year for school, according to the Education Data Initiative.


Grandparents can be an untapped source of college money, but historically money they've put into 529 education savings plans has negatively impacted other sources of college funding. That will change with the 2024 to 2025 school year. Disbursals from grandparent 529 plans will no longer affect students' ability to receive financial aid. 

Learn how 529 plans work and why you might start one to help with your grandchildren's  education. For more on personal savings, check out our best savings apps and top automated financial advisors.

Note: I'm discussing 529 education savings plans here, not 529 prepaid tuition plans, which have their own separate benefits and risks.

What are 529 education savings plans?

Named after a section of the Internal Revenue Code, 529 education savings plans are tax-advantaged investments that work like Roth IRAs for education. The money put into 529 plans goes to designated beneficiaries -- such as yourself, your children or your grandchildren -- and any investment income earned on your money is free from federal taxes, and usually state taxes as well.

Money disbursed from 529 plans must be used for educational expenses -- primarily college or private K to 12 tuition but also housing, food, books or educational supplies. If the money can't be used for education expenses, it can be withdrawn, though earnings will be taxed as capital gains and there will be a 10% penalty.

About 30 states allow tax deductions for contributions to 529 plans. Most 529 plans don't have annual contribution limits, but do have aggregate limits for how much you can contribute in total during the life of the account.

Technically, you can contribute up to $16,000 a year for a beneficiary without triggering the federal gift tax, though anything over that amount only goes toward your lifetime estate and gift tax exemption (a whopping $12.06 million in 2022).

Anyone can open a 529 plan for anyone else. There can only be one beneficiary for each 529 plan, although the beneficiary can be changed during the life of the plan.

What's changing for grandparent 529 plans?

Disbursals from grandparent 529 plans for expenses were previously considered part of students' incomes, of which 50% was considered eligible for school expenses in applications for financial aid. If students received money from a grandparent 529 plan one year, it would increase their income and reduce their financial aid for the next year.

Starting in the 2024 to 2025 school year, however, a streamlined FAFSA application means that students will no longer need to report cash support. Any money they receive from grandparents via 529 plans for educational expenses during one year will no longer hurt the amount of financial aid they receive during the next.

FAFSA will instead calculate student income by using tax return data, meaning grandparents can distribute money via 529 plans for their grandchildren's educational expenses without costing them money in financial aid.

How do I start a 529 plan?

You can open a 529 account with any of the 50 states or Washington, DC, with major brokerages such as Charles Schwab, Vanguard or Fidelity, or with banks like Wells Fargo, USAA or Chase. Be sure to check each program's terms for the fees and investment options available in each plan. Most plans trade in mutual funds and stocks, but many also offer investments with lower risks and returns.

You'll need your beneficiary's social security number, as well as the account number and routing number of the bank account you'll be using to fund your 529 plan.

Money paid for educational expenses from 529 plans cannot also be claimed as tax credits for education -- you can't double-dip the tax savings. Because your earned interest will need to make up for the loss of tax credits for educational spending, 529 plans make the most sense when you have time to accumulate earnings on the principal invested -- it's best to get started as early as possible to maximize your tax savings.

For additional reading, learn how to save for your child's college savings account and all the best deals, discounts and freebies for students right now.