A revamp of the Free Application for Federal Student Aid (FAFSA)—the form that determines financial aid for college students—that was first released for the 2024-2025 academic year offered an important win for families going forward: 529 plans owned by someone other than the beneficiary's parent no longer affect financial aid eligibility.
Distributions from these 529 plans were formerly treated as student income, which could reduce need-based aid. But thanks to the FAFSA changes, they are no longer considered in the application process.
The change could be especially beneficial for grandparents and other family members who live in one of the more than 30 states, plus Washington, D.C., that offer either a tax credit or a tax deduction for contributions to their state-sponsored 529 plans. (Nine states—Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania—offer residents a tax benefit for contributions to any state's 529 plan.)
Individuals can also use 529 plans as a wealth-transfer vehicle. Under current law, you can gift up to $19,000 per beneficiary per year to a 529 plan without dipping into your lifetime gift tax exclusion amount. ($13.99 million in 2025; $15 million in 2026.) What's more, 529 plans have a special provision that allows you to contribute five years' worth of gifts in a single year ($95,000 in 2025) if you treat them as happening over five consecutive years for tax purposes. That means a married couple could contribute up to $190,000 in 2025 to any number of eligible family members—though they won't be able to make additional contributions to those accounts for another five years.
This approach might seem excessive, but when you consider the growth potential, supercharging a 529 plan allows you to create a college-savings fund that could potentially span generations. Of course, it's possible lawmakers could limit the tax advantages of such contributions in the future, but for now it's a way to support a child's, grandchild's, or even great-grandchild's educational goals.
That said, it's important to note that 529 distributions are still a factor on the College Scholarship Service (CSS) Profile, which is used by many private universities and some public institutions. If a student is applying for financial aid from one of those participating colleges, any 529 funds benefiting them for the school year must be reported on their CSS Profile. That doesn't mean you shouldn't contribute—just be aware of how your 529 funds could ultimately affect the student's financial aid.
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This material is intended for general informational and educational purposes only. This should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decisions.
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Investors should consider, before investing, whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available in such state's qualified tuition program.
A special gift-tax exclusion allows for contributions exempt from federal gift taxes of $95,000 ($190,000 per couple) per beneficiary in a single year. To qualify for the special gift-tax exclusion, you need to file a United States Gift-Tax Return form to treat the gift as if it were made in equal payments over five years. To avoid gift tax, you should make no additional gifts to the beneficiary during those five years. To qualify for gift-tax exclusion, contribution must be received by December 31. If you are a Kansas taxpayer and make a contribution between January 1 and the tax filing deadline, you are allowed to choose either the current tax year or previous tax year for the state income tax deduction.
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