Grandparent 529s and the New FAFSA: What Changed, and What the Viral Posts Leave Out

There's a post going around with a simple recipe. Open the 529 in the grandparent's name, make the grandchild the beneficiary, and the new FAFSA never sees it. The federal part of that is true. The post leaves out who still counts the account, what the move is worth in dollars, and what the grandparent takes on by owning it. This is the full version.

What the old rule did

Until the 2024-25 form, the FAFSA asked students to report cash support from anyone other than their parents. A tuition payment from a grandparent's 529 counted as that support, and it was treated as the student's untaxed income.

Student income is assessed hard. Under the old formula, as much as half of it above a small allowance came off the next year's aid eligibility. The FAFSA also looks at income from two years earlier, so a freshman-year withdrawal showed up on the junior-year form. That is why advisors told grandparents to wait until the last year of college to pay, after the final FAFSA was filed.

What the new FAFSA changed

The FAFSA Simplification Act rewrote the form starting with the 2024-25 year. The cash support question is gone. The form now pulls income straight from IRS tax data, and a 529 withdrawal spent on tuition never appears on the student's tax return.

Two things follow. A grandparent's 529 balance was never reported as an asset, because the FAFSA only asks about parent and student assets. And now the withdrawal isn't reported as income either. On the federal form, the account is invisible from the first deposit to the last tuition payment. The 2026-27 FAFSA works this way and uses 2024 tax information.

The post, claim by claim

The CSS Profile still asks

A couple hundred colleges, mostly private and well funded, use a second form called the CSS Profile to hand out their own grant money. The CSS Profile asks about every 529 that names the student as beneficiary, whoever owns it. Some schools add a question about help the family expects from relatives.

Those schools can reduce their own aid based on the answer. Federal aid, meaning Pell Grants, federal loans and work-study, still follows the FAFSA. So the size of this advantage depends on where your grandchild applies. Each school's aid office can tell you how it treats a grandparent's 529.

How much the move is worth

The comparison that matters is against a parent-owned 529, since that is the account most families already have. A parent-owned 529 is reported as a parent asset, and parent assets are assessed at no more than 5.64% a year. Withdrawals from it have never counted as income. The financial aid guide walks through the rates.

So the grandparent route saves the asset test, nothing more. On a $50,000 balance that is at most about $2,800 of aid eligibility per year, and only for a family that qualifies for need-based aid in the first place. Many families with that much saved get little need-based aid, and for them the difference is zero. Compared with a UTMA, which is counted as the student's own asset at 20%, the gap is larger. The grandparent 529 vs. UTMA guide covers that side.

What the post leaves out about owning it

• The grandparent controls the money. They can change the beneficiary to a different grandchild or take the money back, paying tax and the penalty on earnings. The parents have no legal say.
• Name a successor owner. Without one, the account passes through the grandparent's estate. Most plans let you name a successor on the application or in the account settings. The successor guide explains how that handoff works.
• Medicaid counts it. A 529 the grandparent owns is their asset if they later apply for Medicaid to cover long-term care, and gifts into it fall inside the look-back period.
• Gift tax paperwork. Deposits above the annual exclusion per giver, per grandchild, mean filing a gift-tax return, though no tax is owed until lifetime gifts are very large. A 529 also allows five years of exclusions in one deposit. The gift tax guide has the mechanics.
• The state deduction follows the owner in most states. A grandparent in a state with a 529 deduction usually claims it on their own return. Some states limit the deduction to the in-state plan. See 529 tax benefits by state.
• "Tax free" has a condition. If the grandchild skips college or gets a scholarship, the options for leftover 529 money apply, including the Roth IRA rollover after 15 years.

Does timing still matter?

For schools that only use the FAFSA, no. The old "wait until senior year" advice existed to keep the withdrawal off the income line, and that line is gone. For CSS Profile schools, the balance is asked about every year whether or not money has come out, so timing a withdrawal doesn't hide the account.

Where MemoryBank fits

A grandparent-owned 529 sits in the grandparent's login at the plan provider, which the parents can't see from their own accounts. If the family wants the child to watch it grow beside their other accounts, it can be tracked in MemoryBank by connecting it or entering the balance by hand. The 529 tracking guide shows both routes.

What MemoryBank doesn't do

MemoryBank is not a brokerage. It cannot receive, keep or transfer securities. It doesn't file the FAFSA or the CSS Profile, and it doesn't talk to schools.

Frequently asked questions

Does a grandparent-owned 529 affect FAFSA?

Not on the current form. The FAFSA never asked about a grandparent's 529 balance, and since the 2024-25 year it no longer asks about withdrawals paid toward the student's costs either. The account doesn't appear on the federal form at any point.

Does the CSS Profile count a grandparent 529?

Yes. The CSS Profile asks about every 529 that names the student as beneficiary, regardless of owner, and some schools add their own question about expected help from relatives. Schools that use it can reduce their institutional aid based on the answer. Federal aid still follows the FAFSA.

Is a grandparent-owned 529 treated differently from a parent-owned 529 for financial aid?

On the FAFSA, a parent-owned 529 is reported as a parent asset and assessed at no more than 5.64% a year. A grandparent-owned 529 isn't reported at all. Withdrawals from either one don't count as income. The difference is the asset test only, and it is zero for a family that doesn't qualify for need-based aid.

Do grandparents still need to wait until senior year to pay from a 529?

Not for schools that only use the FAFSA. That advice existed because the withdrawal used to count as student income two years later, and that question is gone. CSS Profile schools ask about the balance every year, so timing a withdrawal doesn't hide the account from them.

Is a withdrawal from a grandparent's 529 tax free?

Federally, yes, when it pays for qualified education costs such as tuition, fees, books, and room and board for a student enrolled at least half time. Earnings taken out for anything else are taxed as income plus a 10% penalty. A few states tax 529 withdrawals differently from the federal rules.

Can a parent see a grandparent's 529 in MemoryBank?

The account lives in the grandparent's login at the plan provider, so the parents can't see it from their own accounts there. The family can track it in MemoryBank by connecting it where the provider supports linking, or by entering the balance manually and updating it when a statement arrives.

What to do next

1. Ask which colleges your grandchild is likely to apply to, and whether they use the CSS Profile.
2. If a grandparent opens a 529, name a successor owner on the account.
3. Check your state's deduction rules before choosing a plan.
4. Run the plan past a tax professional or a college financial aid advisor. The rules changed once and can change again.