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 A key advantage to having a 529 is that earnings grow tax-free and aren’t taxed when they are withdrawn to pay for qualified education expenses.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.