Back to School – 529’s, FAFSA, and Good News for Families

October 20, 2022

Since their introduction nearly 30 years ago, 529 plans have been the go-to savings vehicle for ever-increasing college education costs. New changes to the FAFSA will change the way families plan around generational gifts for college costs.

First, Back to Basics

What is a 529 Plan?

A 529 plan (named after Section 529 of the Internal Revenue Code) allows a student or family member a tax-advantaged way to invest for future education costs.  Not only do the monies grow tax-sheltered, but all withdrawals are tax-free upon distribution when used to pay for qualified education expenses. Some state-sponsored plans also offer income tax deductions or even matching funds for 529 contributions.

What is a Qualified Educational Expense?

Qualified expenses include tuition and fees for most types of postsecondary educational institutions (colleges, trade schools, etc.). Also, with some limitations, qualified expenses can include a large portion of room and board, textbooks, computers, and supplies, as well as repayment of student loans and reimbursement for scholarships earned.[1]

What are the contribution limits?

While there are some lifetime limits to the amount that can be contributed to 529 plans, there are no annual contribution limits. However, contributions made by someone other than the student beneficiary are considered completed gifts for tax purposes, and therefore limited to $16,000/year ($32,000 from a married couple) in 2022, in order to qualify for the annual gift tax exclusion. While contributions above this amount are possible, one would need to consult with their tax advisor before doing so.

So, What’s New? - An Advantage for Grandparents

The FAFSA (Free Application for Federal Student Aid) is administered by the U.S. Department of Education to determine a student’s eligibility for federal financial aid, such as grants, scholarships, or loans. Many universities also use the FAFSA as the basis for awarding their own financial aid, making it a critical part of the college planning process.

Currently, the FAFSA considers the assets and income of both students and their parents, and available aid is reduced based on those figures. Assets owned or income earned by the student results in a greater reduction in aid, which has incentivized parents and grandparents to keep assets out of the names of children prior to college years.

While grandparent-owned 529 plans are not counted as student assets, the FAFSA currently considers any withdrawal from such an account to be untaxed income to the student in the year it is made, thereby reducing aid eligibility by as much as 50%. Since FAFSA is based on a 2-year lookback period, a current best practice is to distribute 529 monies in the last 2 years of schooling, so as to avoid counting that income against eligible financial aid.

With the recent changes to the FAFSA rules, beginning with the 2024-2025 school year, distributions from a grandparent-owned 529 plan will no longer impact a student’s financial aid eligibility. This opens the door for grandparents to play a larger role in funding college expenses without negatively impacting financial aid qualification.


Planning for college costs is a multi-faceted endeavor including both the saving and investing decisions, as well as navigating the rules surrounding 529 plans and the many sources of financial aid.  The most important thing is to get started early, then get to know your options and take advantage of all the benefits 529 plans have to offer.                                 

If you are planning for your children or grandchildren’s education, or have questions about 529 plans, please give us a call!


[1] See official IRS guidelines at