Making college more affordable with a grandparents’ touch

Making college more affordable with a grandparents’ touc
Key takeaways

Funding a 529 account for your grandchild may enhance their personal, social, and professional quality of life.


A 529 plan allows grandparents to maintain control of funds, potentially benefiting from tax-deferred growth, and make flexible contributions with significant tax benefits.


New FAFSA rules have incentivized grandparent contributions by no longer requiring students to report cash support or distributions from 529 plans owned by grandparents as income.

The far-reaching potential benefits of a college degree

Research from The College Board and the Bureau of Labor Statistics underscores the substantial benefits that a college education may provide to your grandchild's quality of life across various dimensions.

  • Personally, a college degree is associated with increased overall happiness and greater life experiences, leading to lower divorce rates and an improved quality of life for future families. 
  • Socially, graduates tend to be more involved in their communities, enjoy elevated social status, and have more time for hobbies and leisure activities.1
  • Professionally, the advantages are even more pronounced, with college-educated individuals typically earning higher salaries, attaining higher-level job statuses, and achieving greater savings levels.2

By funding a CollegeBound 529 account for your grandchild, you are investing in potential benefits that may extend well beyond financial gains, potentially fostering a brighter and more fulfilling future for them.

529 plans are flexible and tax-efficient

A 529 plan is a tax-advantaged savings plan designed for contributing towards a child or grandchild’s education. The earnings within the plan are exempt from federal income tax and, typically, state income tax, provided they are used for qualified education expenses.

Grandparents may find 529 plans attractive for several reasons:

  • As the account owner, you maintain control of the funds until they are distributed to cover your grandchild's education costs, ensuring flexibility and security.
  • If you do not need the income from your required minimum distributions (RMDs), you might consider using them to fund a 529 plan. This allows you to retain control of the assets while potentially benefiting from tax-deferred savings.
  • 529 plans offer diversified investment options, with earnings typically exempt from federal and most state taxes when used for qualified education expenses.
  • CollegeBound 529 plans require no minimum initial investment, enabling you to start small if needed. For estate planning purposes, you can contribute up to $18,000 annually per grandchild (or beneficiary) without incurring gift taxes. This amount doubles to $36,000 if you are married and file taxes jointly. If you need to make a larger contribution, you can also contribute up to $90,000 ($180,000 if married, filing jointly) at one time and elect to treat it as a five-year gift, avoiding gift taxes.

New rules have further incentivized grandparent contributions

Changes to the Free Application for Federal Student Aid (FAFSA) rules have simplified the financial aid process for students and their families, particularly concerning contributions from grandparents. Under the old FAFSA rules, any cash support or distributions from 529 plans provided by grandparents were considered untaxed student income. This meant that if a grandparent contributed to a student's education expenses directly or through a 529 plan, the student had to report this support on their FAFSA. This reporting could significantly reduce the student's eligibility for need-based financial aid, as student income is assessed at a higher rate (up to 50%) than parental income.

Starting with the 2024-2025 FAFSA, the rules have changed in the following ways:

1. No reporting of cash support:

  • Students are no longer required to report cash support received from grandparents. This means that any financial gifts or cash assistance provided directly to the student will not affect their financial aid eligibility.

2. Exclusion of 529 plan distributions:

  • Distributions from 529 plans owned by grandparents are no longer required to be reported as student income. Previously, such distributions would be considered untaxed student income, potentially reducing the student's financial aid eligibility. With the new rules, these distributions are excluded from the FAFSA.

It’s never too late to start saving

Your financial professional can help you get started and stay on course with appropriate investment choices for your family and your needs. In addition, they can explain implications for taxes and financial aid eligibility, offer guidance about estate planning, and help you maximize the potential benefits of having a CollegeBound 529 plan.

To learn more about starting a CollegeBound 529 account for your grandchild, visit


  • 1

    Source: The College Board, “Education Pays, 2019.”

  • 2

    Source: Bureau of Labor Statistics; “Education pays, 2020,” Career Outlook, June 2021

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