529 college savings plans

Dear Liz: What is the best way for us to contribute to our grandchild’s college expenses? I believe federal financial aid formulas no longer count grandparents’ cash or 529 contributions. Would direct cash to the student (who is responsible) or a 529 be the most beneficial to the student or us?

Answer: If the grandchild is already in college, then cash contributions may make the most sense. The tax benefits of a 529 plan at this point would be minimal, and you’d face some restrictions in what expenses qualify.

Keep in mind, though, that you may need to file a gift tax return if you give more than the annual exclusion amount, which in 2026 is $19,000 per recipient. You won’t actually have to pay gift taxes until the amounts you give away over that annual exclusion total more than your lifetime gift and estate tax exclusion amount, which in 2026 is $15 million per person.

Any amount you pay directly to the college for tuition expenses isn’t counted toward the gift tax exclusion. (The same is true for any medical expenses you pay on behalf of someone else, as long as the payments are made directly to the medical provider.) In other words, there’s no limit on how much tuition you can pay, as long as you pay the college directly.

If college is still many years away, then 529 college savings plans are often the best option.

These plans, administered by the states, allow contributions to be invested and grow tax-deferred. Withdrawals are tax-free when used for qualified education expenses, including tuition, room and board, books and supplies, computers and related equipment and repayment of student loans.

Qualified education expenses do not include transportation costs, insurance payments or room and board above what school housing and meal plans would cost.

There’s no federal tax deduction for contributions to 529 college savings plans, although many states offer tax breaks (California and Oregon are among the states that don’t offer such incentives).

The tax breaks typically apply only if you contribute to that state’s plan, but you’re allowed to contribute to any state’s plan and use the money at nearly all accredited two-year, four-year, and graduate schools in the U.S. and many schools abroad.

Morningstar rates each plan annually.

For the wealthy, 529 plans have another benefit: up to five years’ worth of annual exclusion amounts can be contributed at once, without having to file a gift tax return. In 2026, that means you could contribute up to $95,000 per recipient.

In the past, 529 plan assets had only a small impact on financial aid, but distributions were another story. Money distributed from a grandparent-owned account was treated as untaxed income to the student, which could reduce financial aid by up to 50%.

Today’s Free Application for Federal Student Aid (FAFSA) no longer counts such distributions or any cash contributions from people other than the child’s parents. The formula also doesn’t count 529 plans owned by people other than the parents.

Such plans are still counted by the CSS Profile, which is used by about 200 private colleges, and some of the schools also count distributions. If your grandchild attends one of these schools and receives financial aid, check with the school’s financial aid office about how your generosity could affect their aid package.