The FAFSA Simplification Act and What it Means for 529 Accounts
The federal government has some good news for parents and students who may be anxious about filling out famously endless financial aid forms to help pay for their children’s college expenses.
Changes to the Free Application for Federal Student Aids (FAFSA) will go into effect this year for the 2024-2025 academic year. Among the many improvements is the two-thirds reduction in questions on the form from 108 to 36.
For 529 plan holders, one of the new changes is making it even more compelling for grandparents and other relatives to open a 529 account to help pay for future educational expenses without impacting a student’s potential for getting financial aid.
What is a 529, and is it reported on the FAFSA?
A 529 is a tax-advantaged account in which parents – and anyone – can deposit funds to save for future education expenses. Generally, individual states administer plans, and while contributions are not tax-deductible on federal income tax forms, many states, like New Mexico, offer a state tax deduction for contributions. A key advantage to having a 529 is that earnings grow tax-free and aren’t taxed when they are withdrawn to pay for qualified education expenses.
To determine financial aid eligibility, the FAFSA will ask about income and assets. If the owner of a 529 plan is a dependent student or parent, the total value of the plan is reported as an investment asset on the application. The good news is a parent-owned 529 account has a minimal impact on financial aid eligibility. Also, 529 account fund distributions aren’t considered student income.
Good News for Parents, Great News for Grandparents
One fundamental change in the FAFSA Simplification Act is great news for grandparents who have been putting funds aside to help pay for their grandchildren’s education.
Before the Simplification Act, any money that grandparents–or other non-custodial relatives–gave for education expenses had to be reported as student untaxed income on the FAFSA. This ran the risk of lowering the student’s eligibility for financial aid. But under the new law, distributions from a grandparent–or any other third-party owned 529 fund—won’t have to be reported on the FAFSA.
This means that a withdrawal from a 529 owned by a grandparent (or other family and friends) is no longer included as untaxed income, meaning it won’t directly impact student aid calculation.
Are contributions to a 529 plan tax deductible?
If you are a New Mexico resident, contributions to one of New Mexico’s sponsored plans, such as The Education Plan are deductible from your New Mexico state taxable income each year. What’s more, the money in your plan grows tax deferred, so all the money that comes out to pay for qualified educational expenses is tax-free on withdrawal. However, it’s important to note that a grandparent’s contributions to a 529 plan are still subject to the federal annual gift exclusion.
There’s more!
Visit the Learning Center for more information on the tax-advantaged benefits of 529 plans, including details on how to open an account, how to save, what the funds may be used for, when and how to take withdrawals, how to choose or change a plan beneficiary, and much more.
Ready to get started? You can open an account with The Education Plan in about 15 minutes.
Frequently Asked Questions
A 529 plan is a tax-advantaged investment account that is designed to grow savings for future education expenses for a specified beneficiary. 529 plans offer unique benefits and features that make them an appealing strategy for education related saving.
A 529 plan can be used for “qualified educational expenses.” For federal tax purposes, qualified educational expenses include:
- Tuition and fees at accredited higher education institutions
- Books
- Supplies and equipment
- Room and board for beneficiaries attending on at least a half-time basis.
- Computer technology, equipment, and internet access
- Up to $10,000 a year for K-12 tuition and expenses (Limit increase to $20,000 in 2026)
- Expenses for educational special needs services
- Transfers to an ABLE account for the beneficiary (transfer subject to annual limit)
- Apprenticeship expenses
- Up to $10,000 for student loan repayment
- Credentialing expenses and certification programs
- Roth IRA rollover for the beneficiary
If you're not sure if an expense is considered "qualified," we recommend consulting with a tax professional or advisor. Unqualified expenses will be treated like ordinary income: state and federal taxes will apply, with a 10% federal penalty for withdrawals from your 529 plan used to pay for them.
New Mexico residents can deduct contributions to The Education Plan from their state taxable income each year. This includes contributions made to an account that you are not the account owner of.
You cannot deduct contributions from federal income taxes.
Any person at least 18 years old with a valid Social Security Number (SSN) or Tax Identification Number (TIN) can open a 529 account. The account holder chooses the investment options, designates a beneficiary, and requests the distribution of funds.
The cost of college continues to rise, including tuition, housing, food and supplies, so it’s important to begin saving as soon as possible. You can learn more about how much a typical college education costs on our Cost of College page. It’s never too early or too late to start.
The Education Plan offers a variety of investment options to fit you and your family’s needs, risk tolerance and goals. You can see all of the available investment portfolios on the investments page.
Yes, you can use up to $20,000* a year to cover tuition and expenses for K-12 education.
Qualified K-12 expenses include:
- Tuition (public, private, and religious)
- Curriculum materials, books (including digital/online) and instructional materials
- Tutoring and instructional classes**
- Fees for a nationally standardized norm-referenced achievement test, an advanced placement examination, or any examinations related to college or university admission
- Dual enrollment program fees
Educational therapies for students with disabilities provided by a licensed or accredited practitioner or provider, including occupational, behavioral, physical, and speech-language therapies
*Starting in tax year 2026. The annual limit is $10,000 in tax year 2025 and permitted for tuition only.
**Tuition for tutoring or educational classes outside of the home, including at a tutoring facility, but only if the tutor or instructor is not related to the student and—
(i) is licensed as a teacher in any State,
(ii) has taught at an eligible educational institution,
or (iii) is a subject matter expert in the relevant subject.
You can open an account with The Education Plan online or by mailing in the enrollment form. In order to open an account, you will need the following information:
- Your social security number or TIN
- Your address
- Your bank account information (in order to fund the account)
- The beneficiary’s social security number or TIN
- The beneficiary’s birthday
-The beneficiary’s address
