New FAFSA Rules Opened Up a 'Grandparent Loophole' That Boosts 529 Plans

The 529 education savings plan got a couple of big upgrades in 2024 as a tool to save and pay for school. Starting this year, Congress is allowing up to $35,000 in leftover savings in the plan to roll over tax-free into Roth individual retirement accounts, eliminating fears unused money could forever be trapped or incur taxes. Then, at the end of December, the Department of Education revised the Free Application for Federal Student Aid (FAFSA), creating the so-called grandparent loophole. The grandparent loophole allows grandparents to use a 529 plan to fund a grandchild’s education without affecting the student's financial aid eligibility. Previously, withdrawals could have reduced aid eligibility by up to 50% of the amount of the distribution.