While many grandparents enjoyed relatively affordable college costs when tuition and living expenses were manageable enough to graduate with little debt, the landscape has shifted drastically for today’s students. The cost of a four-year university education has skyrocketed over 400% from just $5,500 annually in 1985-1986 to $28,840 in 2023, with out-of-state and private universities costing up to $60,420 (the price of a nicely equipped car every year, for four years!). With costs wildly outpacing increases in financial aid and inflation, students now face the harsh reality of taking on mortgage-sized debt to pursue a degree, burdening an entire generation with staggering loan balances that significantly delay major life milestones.
If you have substantial assets, you understand the value of setting up future generations for success. One of the greatest gifts you can provide is helping fund your grandchildren’s education through a 529 college savings plan. And thanks to recent legislation, this gift just became even more powerful.
The FAFSA Simplification Act brings a lucrative “grandparent loophole” that allows you to contribute generously to a 529 plan without jeopardizing your grandchild’s eligibility for financial aid. This opens up a wealth of strategic opportunities for families.
The Grandparent 529 Plan Advantage
Previously, distributions from a grandparent-owned 529 plan counted as untaxed student income on the FAFSA, potentially reducing aid by up to 50% of the distribution amount. For example, a $20,000 withdrawal could slash a student’s aid package by $10,000 – a significant penalty.
However, starting in the 2024-2025 academic year, the new FAFSA rules no longer require students to report cash support or 529 plan distributions from grandparents. This means you can fund a grandchild’s education through a 529 plan without diminishing their ability to qualify for need-based aid and scholarships.
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Tax-Smart Wealth Transfer
In addition to protecting financial aid, grandparent-owned 529s allow for highly tax-advantaged wealth transfer when used optimally:
- Tax-Free Growth: 529 plan assets are tax-free over decades, maximizing your contributions.
- Tax-Exempt Withdrawals: Distributions avoid federal and state taxes when used for qualified education expenses.
- Gift Tax Benefits: You can contribute up to $18,000 annually per grandchild ($36,000 from a couple) without triggering the gift tax. Even better, you can front-load up to 5 years’ worth of gifts.
- Estate Planning: 529 plan assets removed from your taxable estate can translate to significant estate tax savings when transferring wealth.
Let’s put some numbers into perspective. Say you contribute $5,000 annually from age 50 to 66, totaling $80,000, which grows tax-free (for this example, at an estimated 6%) to around $115,000 by college enrollment. For a $150,000 4-year public university degree (including tuition, room, board, and other expenses), this $115,000 covers approximately two-thirds of the total cost. The remaining $35,000 in expenses allows your grandchild to qualify for substantial need-based aid like grants, work-study, and subsidized loans since assets in a 529 plan aren’t factored into federal aid formulas. This way, your $115,000 contribution would cover most expenses while making them eligible for additional aid to afford the remaining balance without excessive debt.
Leave a Lasting Legacy
Funding your grandchildren’s education is one of the most meaningful wealth transfer actions you can take (and it definitely elevates you to “favorite grandparent status”). With the new “grandparent loophole” in 529 plans, you can ensure your contributions have maximum impact by:
- Allowing your grandchildren access to a college education without crushing debt
- Positioning them for future economic success (not paying for college into their mid-40s)
- Help them get a jump start on life with a solid financial footing out of the gate
At Hill Island Financial, we help affluent families like yours develop customized wealth transfer strategies that are tax-efficient, compliant, and aligned with your values. Our experienced team can guide you through all aspects of 529 planning, from projecting education costs to structuring contributions for maximum benefit. We’ll ensure your generational wealth has a smart, lasting impact.
Education planning is a critical component of your overall financial plan and legacy. Contact us today to explore how the 529 grandparent loophole opens new possibilities for your family’s future prosperity.
Neither Hill Island Financial nor its investment advisor representatives are CPAs or tax attorneys. Our work involves coordination with your qualified tax professional, not providing tax advice or recommendations directly.
