Grandparent 529 Plans in 2026: The New FAFSA Rules and Superfunding

What Changed for Grandparent 529s With the New FAFSA

Before the 2024-25 form, the problem with a grandparent-owned 529 was never the balance, which the FAFSA did not ask about. It was the timing of the withdrawals. Money a grandparent paid toward the student’s costs counted as untaxed student income, and because the FAFSA measured income from two years earlier, a withdrawal surfaced on a later form, where available student income was assessed at up to 50%. A $30,000 withdrawal in the fall of the freshman year would appear on the junior-year FAFSA and could reduce aid eligibility by as much as $15,000. The usual workaround was to wait until January of the sophomore year, after which no remaining FAFSA would reach back far enough to see the withdrawal.

The FAFSA Simplification Act removed that exposure, the change often called the grandparent 529 loophole. Starting with the 2024-25 FAFSA, the form dropped its questions about cash support and payments others make for the student, and it now takes income straight from federal tax returns through the IRS data exchange. A qualified 529 withdrawal never shows up on a tax return. A grandparent-owned 529 is now invisible to the FAFSA both as an asset and as income, and the timing workaround is unnecessary for a family that only files the FAFSA.

A parent-owned 529 is treated differently. It is reported as a parent asset, and parent assets are assessed at up to 5.64% in the aid formula, so a $100,000 parent-owned 529 can reduce aid eligibility by up to $5,640 a year. For a family likely to qualify for need-based aid, that difference alone can tip the ownership decision toward the grandparents.

The CSS Profile is where the old rules can still bite. A few hundred colleges, most of them private, use it to award their own institutional aid, and it can ask about 529 accounts owned by grandparents and about support from grandparents. Schools that use it do not treat those answers the same way, so for a grandchild likely to apply to those colleges, the useful step is to ask each school’s aid office how it handles a grandparent-owned account before deciding who owns it.

Who Should Own a Grandchild’s 529

With the FAFSA penalty gone, the ownership decision turns on a handful of practical questions.

Control. The owner of a 529, not the beneficiary, controls it. A grandparent who owns the account decides when money comes out, can change the beneficiary to another family member, such as a sibling or cousin, without tax, and can even take the money back, subject to income tax and a 10% penalty on the earnings. Federal law sets no deadline for using the money, so an account can outlast its first beneficiary; moving it to a beneficiary a generation lower, such as a great-grandchild, is treated as a gift from the current beneficiary to the new one, while a move to a sibling or cousin is not. A grandparent who contributes to a parent-owned account has made a completed gift, and the parents decide from there.

Financial aid. For a family that only files the FAFSA, grandparent ownership now costs nothing in aid, while parent ownership is assessed at up to 5.64% a year. At CSS Profile schools, the answer depends on the school.

The estate. A 529 is one of the few places a grandparent can keep control of money that is nonetheless outside the grandparent’s taxable estate. Contributions count as completed gifts even though the owner can still redirect or reclaim them. With the $15 million federal exemption, that feature matters mainly to families large enough to face the federal estate tax and to grandparents in a state with its own estate tax.

If the owner dies. A 529 passes to the successor owner named on the account, not under the owner’s will. An account with no successor named can end up in probate, and the grandchild’s college money can be frozen while that happens. Naming a successor owner, often one of the grandchild’s parents, is the step most often skipped, and it belongs with the rest of an estate plan beyond the will. One side effect: once a parent becomes the owner, the account is a parent asset on the FAFSA from then on.

529 Superfunding: Five Years of Gifts at Once

For 2026, a grandparent can give $19,000 to each grandchild without using any of the lifetime gift and estate tax exemption. A 529 has a special rule on top of that: a contribution larger than the annual exclusion can be treated as if it were made evenly over five years, sometimes called five-year gift tax averaging. A grandparent can therefore put $95,000 into a grandchild’s 529 in one year, and a couple can put in $190,000, with no gift tax and no use of the exemption. The election is made on a gift tax return, Form 709, for the year of the contribution (each spouse files one for a couple), and it uses up the annual exclusion for that grandchild for all five years, so other gifts to the same grandchild during those years count against the lifetime exemption. If a couple’s $190,000 comes from one spouse’s separate money, the couple also needs to elect gift splitting on those returns, an election that covers every gift either spouse makes that year. In Texas and other community property states, most money a couple accumulates during the marriage is community property, which is already treated as given half by each spouse. Because a grandchild is two generations down, these gifts are also generation-skipping transfers, but amounts that fit within the annual exclusion, including the five-year election, don’t use any of the separate $15 million GST exemption either.

The reason to do it is time. Consider a couple with a newborn grandchild. If they put $190,000 into the grandchild’s 529 at birth and it earns 6% a year, it grows to about $542,300 by age 18. If they instead give $38,000 a year for five years, the same total, it grows to about $484,300. Front-loading is worth about $58,000 in this example, simply because the money starts compounding sooner. A single grandparent superfunding $95,000 ends at about $271,200, compared with about $242,200 for five annual gifts.

There is one estate wrinkle. If the grandparent dies before the five years are up, the part of the gift allocated to the years after the year of death is pulled back into the grandparent’s estate. A grandparent who superfunds $95,000 in 2026 and dies in 2028 would have $38,000, the portion for 2029 and 2030, counted in the estate. With a $15 million exemption, that rarely produces any federal tax, which is part of why the estate tax is seldom the real reason for superfunding today; grandparents in a state with its own estate tax, usually at a much lower threshold, are the exception. Our article on the $15 million estate tax exemption covers who still needs to plan around it.

Two gifts sit entirely outside these limits. Tuition paid directly to a school, and medical expenses paid directly to a provider, are not gifts at all for gift or generation-skipping tax purposes, so a grandparent can pay a grandchild’s tuition bill without touching the annual exclusion or the lifetime exemption. Direct tuition payments only cover tuition, not room, board, or books, which is one reason many families use both tools.

What OBBBA and SECURE 2.0 Changed for 529s

A 529 can now pay for more than it could a few years ago, and money that isn’t needed for school has more places to go.

K-12. Since July 2025, K-12 withdrawals can cover more than tuition: curriculum and books, online educational materials, tutoring or classes outside the home from an unrelated tutor who is a licensed teacher, has taught at a college, or is a subject matter expert, standardized and admissions test fees, dual-enrollment fees, and educational therapies for students with disabilities. Starting in 2026, the annual limit on K-12 withdrawals doubles from $10,000 to $20,000 per student.

Credentials. For withdrawals since July 2025, OBBBA added recognized postsecondary credential programs, the licenses and certifications behind many skilled trades and professions, to the list of qualified expenses, including required testing and continuing education to keep the credential. For a grandchild who takes a path other than a four-year degree, the 529 is no longer stranded.

The Roth relief valve. Under SECURE 2.0, leftover 529 money can roll into the beneficiary’s Roth IRA, up to $35,000 over the beneficiary’s lifetime. The conditions are strict. The 529 must have been open for that beneficiary for at least 15 years; contributions made in the last five years, and their earnings, cannot be rolled; each year’s rollover counts against the beneficiary’s Roth IRA limit, $7,500 in 2026, along with any other IRA contributions; and the beneficiary needs earned income at least equal to the rollover. At today’s limit, moving the full $35,000 takes at least five years. The Roth IRA income limits do not apply. Whether changing the beneficiary restarts the 15-year clock is not settled, and the same open question applies to a change of owner, which is exactly what happens when a grandparent dies and the successor owner takes over. Until the IRS answers either question, the rollover is most dependable for an account opened early for the grandchild who ends up using it.

Other exits. A 529 can also repay up to $10,000 of the beneficiary’s student loans over a lifetime, or move to another family member. For a beneficiary with a disability, it can roll into an ABLE account, an option OBBBA made permanent, as long as the rollover fits within that year’s ABLE contribution limit. A withdrawal up to the amount of a tax-free scholarship avoids the 10% penalty, though its earnings are still taxed.

529 State Tax Deductions in Texas and Beyond

Texas has no state income tax, so there is no state deduction for contributing to a 529, and a Texas grandparent can choose any state’s plan on the merits: investment options, costs, and how easy the plan is to use. Texas also offers a prepaid tuition plan tied to tuition and required fees at Texas public colleges, which suits a family confident the grandchild will attend one. It has a residency catch for grandparents: the grandchild must be a Texas resident, or else the purchaser must be a parent who lives in Texas, so a Texas grandparent cannot buy it for a grandchild who lives in another state.

Grandchildren often live elsewhere. If a grandchild’s parents live in a state with an income tax, their state may offer a deduction for contributions to its own plan. Those deductions belong to that state’s taxpayers: some states give them only to the account owner, others to any in-state taxpayer who contributes, so a check written by a Texas grandparent usually earns no one a deduction. When the parents’ state offers one, its rules on who can claim it are worth reading before deciding whose name goes on the account and whose money goes in. Grandparents who live in a state with an income tax face the same question from the other side: their own state may offer a deduction for contributing to its plan, and depending on the state, claiming it may require the grandparent to own the account.

Coordinating With the American Opportunity Tax Credit

One trap catches families who pay every college bill from the 529. The American Opportunity Tax Credit is worth up to $2,500 a year per student for the first four years of college, calculated as 100% of the first $2,000 of qualified expenses and 25% of the next $2,000. The same expenses cannot be used for both the credit and a tax-free 529 withdrawal, so a family that pays all of the tuition from the 529 can lose the credit.

The credit belongs to whoever claims the student as a dependent, usually the parents, and it phases out between $160,000 and $180,000 of modified AGI for a married couple ($80,000 to $90,000 single). For parents under those limits, keeping $4,000 of each year’s tuition out of the 529 preserves the credit. A grandparent can help here too: tuition a grandparent pays directly to the school is treated as paid by the student, and if the parents claim the student as a dependent, as paid by the parents, so it can count toward their credit while falling outside the gift tax limits. The coordination is one of the year-round tax planning decisions worth making before the first tuition bill arrives rather than after.

The account can also sit alongside other vehicles. A Trump account, created by the 2025 tax law and open for contributions since July 4, 2026, has different rules and a different purpose, and our article on how Trump accounts work compares it with a 529.

How We Think About It

We lean toward measuring these decisions by the family’s ultimate tax savings, federal and state, across every state the family touches, without losing sight of the rest of the plan. A grandchild’s 529 often involves households in more than one state, and the best answer for one household is not always the best answer for the family.

We lean toward deciding who owns a grandchild’s 529 by control, flexibility, the colleges the grandchild is likely to consider, and that family-wide tax picture, not by the old aid-timing rules. For families that only file the FAFSA, grandparent ownership now costs nothing in aid; for CSS Profile colleges, it is a question to put to each school; and when the grandparents or the grandchild’s parents live in a state that offers a 529 deduction, whose name is on the account and whose money goes in can change the tax savings.

We lean toward judging superfunding the same way: by its total tax effect, federal and state, alongside time in the market and control. Under the $15 million exemption, the federal estate tax is not what drives the decision for most families, but a state estate tax where the grandparents live can. Beyond taxes, the five-year election matters because money invested at birth has eighteen years to grow; the trade-off is that it uses up five years of exclusions for that grandchild at once.

And we lean toward funding a grandchild’s education only once the grandparents’ own retirement is secure. A 529 can be generous and flexible, but money withdrawn for anything other than education pays income tax and a 10% penalty on its earnings, and the grandparents’ own plan comes first. Our article on how much it takes to retire is a good place to start that math.

Common Questions

Does a grandparent-owned 529 affect financial aid?

Not on the FAFSA. Since the 2024-25 FAFSA, a grandparent-owned 529 is not reported as an asset, and withdrawals from it are no longer reported as the student’s income. A few hundred colleges, most of them private, also use the CSS Profile, which can ask about grandparent-owned accounts and support, and those schools treat them differently, so it is worth asking each one.

How much can grandparents put into a 529 in 2026?

Each grandparent can give $19,000 per grandchild in 2026 without using any lifetime exemption, and a 529 allows five years of that at once: $95,000 per grandparent, or $190,000 for a couple, per grandchild, with a gift tax return filed to make the election. Each state’s plan also caps total contributions for one beneficiary; every state’s cap is above $190,000, though the lowest are not far above it, so families where parents and grandparents both use the same state’s plan should check it.

Can leftover 529 money be rolled over to a Roth IRA?

Yes, up to $35,000 over the beneficiary’s lifetime, if the account has been open for that beneficiary for at least 15 years. Contributions from the last five years and their earnings are not eligible, each year’s rollover is limited to the Roth IRA contribution limit ($7,500 in 2026) and the beneficiary’s earned income, and the Roth IRA income limits do not apply.

Is there a Texas tax deduction for 529 contributions?

No. Texas has no state income tax, so there is no state deduction, and a Texas resident can use any state’s 529 plan. Texas also offers a prepaid tuition plan tied to Texas public college tuition, generally available only when the grandchild lives in Texas. If a grandchild’s parents live in a state with an income tax, their state may offer a deduction for contributions to its plan.