Parent-Owned 529s vs. Grandparent-Owned 529s: What Families Should Know

Saving for a child’s education is one of the most impactful financial gifts a family can give. A 529 college savings plan is often the go-to tool, thanks to tax-deferred growth and tax-free withdrawals for qualified education expenses. But one important decision can affect financial aid, taxes, and long-term planning: who should own the 529 plan — parents or grandparents? Below we break down the key differences. IRS 529 Plans Q&A

Parent-Owned 529 Plans

When parents are the account owners:

• Financial Aid Treatment: Parent-owned 529 accounts are considered a parental asset on the Free Application for Federal Student Aid (FAFSA). Generally, parental assets are assessed at a maximum rate of 5.64% toward the Expected Family Contribution (EFC). This is relatively favorable compared to student-owned assets, which can be assessed at 20%.

• Distributions: Withdrawals from a parent-owned 529 are not treated as student income on the FAFSA, so they don’t reduce future financial aid eligibility.

• Control: The parent maintains control of the account, including investment choices and beneficiary changes.

• State Tax Benefits: In some states, the account owner (the parent) may qualify for a state income tax deduction or credit for contributions.

Best for: Families prioritizing financial aid eligibility and control.

Grandparent-Owned 529 Plans

When grandparents own the account:

• Financial Aid Treatment (Old Rules vs. New Rules):

  • Old FAFSA rules (prior to 2024-25): Distributions from a grandparent-owned 529 were treated as student untaxed income — potentially reducing aid eligibility by up to 50% of the withdrawal.

  • New FAFSA rules (starting 2024-25): This penalty has been eliminated. Grandparent-owned 529 distributions no longer count as student income on the FAFSA, making them much more attractive for aid purposes.

• Ownership & Control: The grandparent, not the parent, controls the account. This can be a positive (ensuring funds are used for education) but may also create coordination challenges with the parents’ planning.

• Estate Planning Benefits: Contributions to a grandparent-owned 529 can help reduce the size of the grandparent’s taxable estate while still retaining control over the funds. Grandparents can also “superfund” the account — making five years’ worth of annual exclusion gifts at once.

• State Tax Benefits: If the grandparent resides in a state that offers deductions or credits, they may benefit from those contributions.

Best for: Grandparents looking to contribute meaningfully to education funding while also engaging in estate planning.

Which Is Better?

Thanks to the FAFSA rule change, grandparent-owned 529s no longer create a financial aid disadvantage, leveling the playing field. The right choice often depends on:

• Control: Do parents or grandparents want to make investment and withdrawal decisions?

• Tax Benefits: Which state’s tax rules make contributions most advantageous?

• Estate Planning Goals: Are grandparents also looking to reduce their taxable estate?

In many cases, a combination approach works best: parents contribute to their own 529 for tax benefits and streamlined control, while grandparents open additional accounts to maximize estate planning advantages and flexibility.

Final Thoughts

Whether a 529 plan is parent-owned or grandparent-owned, the real benefit is the long-term, tax-advantaged growth it provides for education. With recent FAFSA updates, families have more flexibility than ever in deciding ownership, without worrying about unintended financial aid consequences.

Careful coordination between parents and grandparents ensures that contributions are maximized, financial aid is preserved, and the child has the resources they need for higher education.

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