Helping With a Grandchild's Education: What Changed in 2024

Rewritten in 2026. The original, published in 2014, described a trend and cited survey figures from that year. Since then two rule changes have altered the practical advice substantially — both in the family's favour.

For years, grandparents who wanted to help with education costs ran into two problems: helping could reduce the grandchild's financial aid, and money left over in an education account was effectively trapped.

Both were fixed in 2024, and a great deal of advice still in circulation predates the change.

General information, not financial or tax advice. Amounts and conditions change; confirm current figures and discuss your own situation with a tax adviser.

What changed, and why it matters

The financial aid penalty is gone

Under the old rules, distributions from a grandparent-owned 529 plan were reported on the FAFSA as untaxed student income, and student income can reduce federal aid eligibility by as much as 50% of the amount.

A $10,000 distribution from a grandparent-owned 529 could reduce the following year's aid award by $5,000.

Starting with the redesigned FAFSA introduced for the 2024-25 school year, distributions from grandparent-owned 529 plans are no longer reported as student income. The new form relies on information pulled directly from federal tax returns and has eliminated the questions that previously captured financial support from relatives.

Though it is commonly called the "grandparent loophole", any non-parent can use it — including other relatives and friends.

The practical effect: the elaborate timing strategies people used to work around this — waiting until the final years of college to make distributions — are no longer necessary.

Leftover money is no longer trapped

Since January 1, 2024, unused 529 funds can be rolled over into a Roth IRA owned by the beneficiary, tax-free and penalty-free, up to $35,000 in lifetime rollovers under Section 126 of the SECURE 2.0 Act.

The conditions matter and are specific:

The 529 account must have been open for at least 15 years. Rollovers are subject to the annual Roth IRA contribution limit — $7,500 for 2026, or $8,600 if the beneficiary is 50 or older. The beneficiary must own the Roth IRA and transfers must be direct, trustee to trustee. Contributions made within the previous five years are not eligible for rollover, and the beneficiary must have earned income at least equal to the amount being transferred.

Where there are multiple grandchildren, federal rules require a separate 529 account for each.

Some areas of the statute remain subject to interpretation and the industry is awaiting further guidance, though most plans are processing rollover requests.

Why this matters beyond the money: the standard objection to funding a 529 was "what if they get a scholarship, go somewhere cheaper, or do not go at all?" That money is no longer stuck. It can become the start of a retirement account for a young adult instead.

The conversation to have first

The rule changes are the easy part. The family conversation is the part that goes wrong.

Talk to the parents before setting anything up. Education funding decisions sit inside a larger set of choices they are making, and a grandparent who acts unilaterally can create friction that outlasts the gift.

Agree who owns the account. Grandparent-owned is now aid-neutral, which removes the old reason to hand ownership to the parents. But ownership determines control, and that is a family question rather than a tax one.

Agree what it is for, and whether it is a contribution toward a larger plan or the whole of it.

Be clear about whether it is a gift or a loan. Ambiguity here causes more damage than any tax treatment.

Other ways to help

A 529 is not the only route, and for some families it is not the best one.

Paying tuition directly to the institution. Payments made directly to an educational institution for tuition are excluded from gift tax entirely, without using any annual exclusion. It must go to the school, not to the student or the parents, and it covers tuition only — not room, board or books.

Annual gifts within the exclusion. An amount that changes each year and can be given to anyone without gift tax consequences. Check the current figure.

Contributing to a parent-owned 529 rather than opening your own. Simpler, and it puts control with the parents.

Paying specific costs directly — a laptop, a semester's books, transport home. Smaller, immediate, and frequently more useful than it looks.

Before you commit

Your own retirement comes first. This is the one piece of advice that has not changed and is most often ignored. There are loans for education and none for retirement, and a grandparent who runs short later becomes a burden on the same family they were helping.

Understand your state's tax treatment. Many states offer a deduction or credit for 529 contributions, sometimes only to that state's own plan. This can be worth real money and it varies considerably.

Compare plans. You are not limited to your own state's, and fees vary. Where a state tax benefit exists, weigh it against the fee difference.

Check the current figures before acting. Contribution limits, gift exclusions and rollover caps are adjusted, and any article — including this one — is a snapshot.

Rewritten in 2026. The original, published in 2014, described a trend using survey data from that year and predated both the FAFSA Simplification Act and the SECURE 2.0 rollover provision, which together removed the two main obstacles it would have needed to warn about.

For additional public information on investor education and financial planning, see Investor.gov.