In a significant shift to federal student aid policy, the FAFSA Simplification Act has changed how financial contributions from grandparents and other relatives affect a student's eligibility for need-based aid. These changes, first applied to the 2024-25 FAFSA, remove a major penalty that previously discouraged family members from helping with college costs.
What Changed?
Historically, when a grandparent used a 529 plan or other funds to help pay for a student's education, the contribution counted as untaxed income to the student on the FAFSA. This could reduce need-based aid by as much as 50% of the gift amount.
Under the new FAFSA rules:
- Distributions from grandparent- or relative-owned 529 plans are no longer reported as student income.
- This means no reduction in federal aid eligibility when grandparents help pay for tuition or other college expenses.
These changes are part of the broader FAFSA overhaul, which also includes the shift from the Expected Family Contribution (EFC) to the Student Aid Index (SAI) and a simplified application process.
Important Note on CSS Profile Schools
While the FAFSA no longer factors in grandparent contributions, about 200 private colleges that use the CSS Profile for institutional aid still consider 529 plans held by non-parents. Families applying to these schools should review CSS Profile guidelines when planning contributions.
Why This Matters for Families
Greater Flexibility and Support
Grandparents can now contribute to college costs, either during school or after graduation, without jeopardizing federal aid eligibility. This change encourages broader family participation in funding higher education.
More Accurate Financial Picture
By focusing only on parent and student assets reported directly on the FAFSA, the new rules create a clearer reflection of a student's actual financial need.
Strategies for Grandparents to Consider
- 529 "Superfunding": Contribute up to $75,000 (or $150,000 for couples) to a 529 in one year using the five-year gift rule.
- Direct Tuition Payments: Pay tuition directly to the college; these payments are exempt from federal gift tax but may reduce institutional aid at some schools.
- Post-Graduation Support: Help repay student loans after graduation, which avoids aid reporting entirely and allows the student to claim tax benefits on loan interest.
Key FAFSA Updates to Keep in Mind
- Student Aid Index (SAI): Replaces EFC; can be negative (as low as -$1,500), allowing for more accurate assessment of need.
- Custodial Parent Rule: For divorced or separated parents, only the parent providing the most financial support is reported.
- Number in College: The FAFSA no longer divides the SAI by the number of family members in college, a major shift for multi-student households.
- Application Rollout: The new FAFSA debuted for the 2024-25 year but experienced significant delays and updates; families filing for 2025-26 should expect a more stable process.
Conclusion
The elimination of penalties for grandparent contributions is one of the most family-friendly aspects of the new FAFSA. By allowing relatives to assist without affecting federal aid eligibility, the Department of Education has opened new doors for collaborative college funding strategies.
Families should stay informed about both FAFSA and CSS Profile rules and consult financial advisors to optimize contributions and tax benefits while maximizing aid.
