Learn how to leverage the 529 grandparent loophole to maximize college savings under the new FAFSA rules, while avoiding potential financial aid pitfalls
Understanding the 529 plan "grandparent loophole"
Investing in 529 plans—like The Vanguard 529—can be a meaningful way to help a relative save for college. Every little bit you save can help take your loved ones further along their educational journey. And with the new simplified Free Application for Federal Student Aid (FAFSA), 529s owned by grandparents will no longer have an impact on financial aid eligibility for the beneficiary.
What is the 529 grandparent loophole?
Previously, distributions from the plan could reduce the recipient's financial aid by up to 50% of the distribution amount. For example, a $25,000 distribution from a grandparent-owned 529 could mean a $12,500 reduction in a student's financial aid package.
Starting in the 2024–2025 academic year, the simplified FAFSA no longer requires cash support or distributions from a grandparent-owned 529 to be reported. With this update, you can help your loved ones pay for their education without affecting their eligibility for financial aid.
Wondering if a 529 is right for you or your family member? This can help you decide.
Benefits
529 plans aren't just valuable to the beneficiary. They can also enable you to transfer wealth to your loved ones in a tax-advantaged way.
529 plans provide federal tax benefits, including tax-deferred growth and tax-free withdrawals for qualified education expenses.1 You can contribute up to $18,000 annually ($36,000 for a married couple) per beneficiary without having to pay gift taxes. Additionally, you may be able to deduct your contributions from your state income tax—or get a state tax credit—depending on where you live.2
Your loved ones can have multiple 529 accounts in their name and use the savings for K–12 tuition, trade and vocational schools, tuition payments, room and board, apprenticeship programs, and graduate schools in the U.S. or abroad. And if they decide not to use the money for education, you have 2 options. You can either roll over up to $35,000 to a Roth IRA in their name after 15 years or change the beneficiary to another qualifying family member (including yourself).3
Considerations
While the benefits of investing in a 529 plan are extensive, there are a few potential financial impacts to prepare for before starting to contribute.
Although the simplified FAFSA no longer requires that grandparent-owned 529 plan distributions be reported, the College Scholarship Service (CSS) Profile—used by some private colleges to award their institutional aid—will still request information about 529s owned by relatives other than parents and may affect the aid the student receives.
Owners of 529 accounts can withdraw the money at any point. However, you'll have to pay income taxes on earnings along with a 10% penalty if the funds aren't used for qualified education expenses. Keep in mind that 529 plans are flexible and can be used for a variety of educational purposes or transferred to other beneficiaries—including yourself!
Investing in a 529 plan can be a meaningful way for you to play a part in in your loved ones' future accomplishments. With the grandparent loophole, your contributions can make even more of a difference for them. If you're still weighing whether a 529 is right for you, here are a few resources that can help.
A guide to when to start saving for college
Things that may surprise you about 529s
Pave the way for the little ones in your life with The Vanguard 529 Plan. Consider opening an account today.
1 Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. The availability of tax or other benefits may be contingent on meeting other requirements. State tax treatment of withdrawals used for i) expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school, ii) expenses related to apprenticeship programs, or iii) student loan repayments is determined by the state(s) where the taxpayer files state income tax.
2 The availability of tax or other benefits may be contingent on meeting other requirements.
3 Certain restrictions apply, including to whom the assets may be transferred, a required holding period of 15 years, and limits on rollovers of contributions made within the 5 years prior to the rollover. While treated as a qualified withdrawal for federal purposes, IRA rollovers may be considered a nonqualified withdrawal under certain states' tax codes. Consult your tax advisor prior to initiating a rollover.
If you are not a Nevada taxpayer, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Other state benefits may include financial aid, scholarship funds, and protection from creditors.
All investing is subject to risk, including the possible loss of the money you invest.
The Vanguard 529 College Savings Plan is a Nevada Trust administered by the office of the Nevada State Treasurer.
For more information about The Vanguard 529 College Savings Plan, call 844-206-4676 or obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. Vanguard Marketing Corporation, Distributor.
For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Other state benefits may include financial aid, scholarship funds, and protection from creditors. Vanguard Marketing Corporation serves as distributor for some 529 plans.
The Vanguard Group, Inc., serves as the Investment Manager for The Vanguard 529 College Savings Plan and through its affiliate, Vanguard Marketing Corporation, markets and distributes the Plan. Ascensus Broker Dealer Services, LLC, serves as Program Manager and has overall responsibility for the day-to-day operations. The Plan's portfolios, although they invest in Vanguard mutual funds, are not mutual funds. Investment returns are not guaranteed and you could lose money by investing in the Plan.