How Grandparents Can Help Pay for College

What grandparents can actually do to fund a grandchild's education

Grandparents have several concrete ways to put money toward college: opening a savings account in the grandchild's name, contributing to a 529 plan, setting up a custodial investment account, or simply giving money directly to the student or their parents. Each method has different tax consequences and affects financial aid differently, so the right choice depends on how much you plan to give, when you plan to give it, and whether the family will be seeking financial aid.

The most common route is a 529 college savings plan, which lets you contribute money that grows tax-free and can be withdrawn tax-free for college expenses. You can open one in any state (not just your own), and you remain the account owner even though the money is earmarked for a specific grandchild. A second option is a custodial account — either a UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act) account — where you give money to the child, and they legally own it once they reach adulthood. A third is simply saving in your own name and giving money directly when college bills arrive.

Key Takeaways

• A 529 plan lets your money grow tax-free and keeps you in control of the account, but it counts against financial aid more heavily if the grandchild's parents are the owners instead of you.
• Custodial accounts (UGMA or UTMA) transfer ownership to the grandchild at age 18 or 21, which means you lose control but the money is legally theirs and may reduce their financial aid may be able to access.
• Giving money directly to parents or the student at the time college bills arrive avoids most tax and financial aid complications but requires you to have the cash on hand when needed.
• If the family is seeking financial aid, money in a parent-owned 529 counts less heavily against aid than money in a custodial account or the student's own savings.
• Annual gift tax limits allow you to give up to a certain amount per person per year without filing a gift tax return, though the limit is high enough that most grandparents never reach it.

529 plans: How they work and who controls the money

A 529 plan is a tax-advantaged savings account designed specifically for education. You open the account, choose investments (usually mutual funds or target-date portfolios), and contribute money that grows without being taxed each year. When the grandchild is ready for college, you withdraw money to pay tuition, room and board, books, or other may have access to education expenses, and those withdrawals are not taxed.

The key advantage is that you remain the account owner. If the grandchild decides not to go to college, or gets a scholarship, or changes their mind about which school to attend, you can change the beneficiary to another grandchild, use the money for yourself, or withdraw it (though you will owe taxes and a penalty on the earnings, not the contributions). This control matters if you are uncertain about the grandchild's path or if family circumstances change.

The financial aid impact depends on who owns the account. If the parent owns the 529, it counts as a parental asset and reduces financial aid by roughly 5 percent of the account balance per year. If you own the 529 as a grandparent, it does not count against financial aid at all — but when money is withdrawn and given to the student, it counts as student income in the following year, which can reduce aid by up to 50 percent of that amount. This is a real trade-off: a parent-owned 529 is better for financial aid overall, but you lose control of the money.

Custodial accounts: Giving money that becomes theirs

A custodial account (UGMA or UTMA, depending on your state) is a way to give money or investments to a minor while you manage it until they reach the age of majority — usually 18 or 21, depending on the state and the type of account. You open the account at a bank or brokerage, fund it with your money, and you act as the custodian. The grandchild is the beneficiary and legal owner.

The main difference from a 529 is that the money legally belongs to the grandchild once they reach adulthood, and you have no say in how they use it. They could spend it on college, or they could spend it on a car. This is both a strength and a weakness: it teaches financial responsibility and gives the young adult real control, but it also means you cannot redirect the money if circumstances change.

For financial aid, custodial accounts are treated as student assets, which means they reduce aid may be able to access by up to 20 percent of the account balance per year — worse than a parent-owned 529 but better than money in the student's own savings account. The money also grows tax-free while you are the custodian, but once the grandchild reaches adulthood and takes control, they pay taxes on any earnings going forward.

Direct giving: Money in your name until college arrives

The simplest approach is to save money in your own name and give it to the family when college bills arrive. This keeps the money completely separate from the grandchild's finances until the moment it is needed, which means it does not count against financial aid at all while they are in high school.

The trade-off is that you need to have the cash available when tuition is due, and you lose the tax-free growth that a 529 or custodial account provides. If you save $50,000 in a regular savings account over ten years, you will owe taxes on the interest you earn each year. If you save the same amount in a 529, that interest grows tax-free.

This method works well if you are giving a smaller amount, if you are not sure when the money will be needed, or if you want maximum flexibility. It also avoids any complications with financial aid forms, since the money is yours and not reported on the Free Application for Federal Student Aid (FAFSA).

Tax rules for grandparent gifts

The federal government allows you to give money to other people without paying gift tax, up to an annual limit. For 2024, you can give up to $18,000 per person per year without filing a gift tax return. If you are married, you and your spouse can each give $18,000 to the same person, for a total of $36,000 per year. These limits change yearly, and you can find the current year's limit on the IRS website.

If you give more than the annual limit in a single year, you do not automatically owe tax — instead, you file a gift tax return (Form 709) and the excess amount counts against your lifetime gift and estate tax exemption. Most people never reach the lifetime limit, which is currently over $13 million, so this is rarely a practical concern for grandparents funding college.

One exception: if you contribute to a 529 plan, you can make a special election to treat a large contribution as if it were spread over five years. This means you could contribute $90,000 to a 529 in a single year and treat it as $18,000 per year for five years, without filing a gift tax return. This election is available only for 529 contributions and only if you do not make other gifts to that person during the five-year period.

How financial aid treats different types of college savings

When a family fills out the FAFSA, they report assets in different categories, and each category affects financial aid differently. Understanding where your money lands helps you choose the right savings method.

Parent-owned 529 plans and custodial accounts are reported as assets, but they are treated differently. A parent-owned 529 reduces aid by about 5 percent of the balance per year. A custodial account (UGMA or UTMA) reduces aid by about 20 percent per year because it is legally the student's asset. Money in the student's own savings account or checking account is treated the same way as a custodial account — it counts heavily against aid.

A grandparent-owned 529 does not appear on the FAFSA at all, which sounds like an advantage until the money is withdrawn. When you withdraw money from a grandparent-owned 529 and give it to the student, that withdrawal counts as untaxed income to the student in the year it is received, which can reduce aid by up to 50 percent of that amount the following year. This is why financial aid advisors often recommend that parents own the 529 instead of grandparents, even though it means you lose control.

Deciding which method fits your situation

Start by asking yourself three questions: How much do you plan to give? When do you need the money to be available? Will the family be seeking financial aid?

If you are giving a large amount ($20,000 or more) and the family will seek financial aid, a parent-owned 529 is usually the best choice. You can contribute the money, the parents own and control the account, and it counts minimally against aid. You lose control, but the tax and aid benefits are significant.

If you want to keep control and are not concerned about financial aid impact, a grandparent-owned 529 gives you flexibility and tax-free growth. Just be aware that withdrawals will count as student income in the year they are received.

If you are giving a smaller amount or want maximum simplicity, saving in your own name and giving money directly when bills arrive is perfectly reasonable. There is no paperwork, no tax complications, and no effect on financial aid.

If you want to teach the grandchild about money and do not need to control how it is spent, a custodial account works well — but understand that it counts more heavily against financial aid than a parent-owned 529.

Frequently Asked Questions

Can I change the beneficiary of a 529 plan if my grandchild gets a scholarship?

Yes. If the grandchild receives a scholarship, you can change the beneficiary to another grandchild, niece, nephew, or even yourself. If you withdraw the money without changing the beneficiary, you will owe taxes and a 10 percent penalty on the earnings (not the contributions you made), but the contributions themselves come out tax-free.

What counts as a may have access to education expense for a 529 withdrawal?

Tuition, room and board, books, required equipment, and computers all count. Some 529 plans also allow withdrawals for K-12 private school tuition and student loan repayment. Check your specific plan's rules, as they vary.

If I give money directly to my grandchild instead of opening an account, do I owe taxes?

No, as long as you stay within the annual gift limit ($18,000 per person in 2024). The grandchild does not owe taxes on a gift, and you do not owe taxes on giving it. You only file a gift tax return if you exceed the annual limit.

Does a 529 plan affect my own taxes or benefits?

No. Money you contribute to a 529 is not tax-deductible at the federal level (though some states offer a state income tax deduction for contributions). The account does not affect your Social Security, Medicare, or other benefits.

What happens to a 529 if the grandchild decides not to go to college?

You can change the beneficiary to another family member, withdraw the money and pay taxes and a penalty on the earnings only, or leave it in the account. Some states and plans also allow you to roll unused 529 money into a Roth IRA for the beneficiary, though rules vary.