Can Grandparents Pay for College? What to Consider

Grandparents often desire to contribute to their grandchildren’s college education, seeking ways to provide financial support without unintended financial or tax consequences. Various avenues exist for this generosity, each with distinct considerations.

Paying Tuition Directly to Institutions

Grandparents can directly pay a grandchild’s tuition to a qualified educational institution without incurring gift tax implications. The Internal Revenue Code (IRC) Section 2503(e) provides an unlimited gift tax exclusion for tuition payments made directly to the educational organization. This exclusion applies only to tuition and does not extend to other college-related expenses such as room, board, books, or supplies.

This direct payment method also generally avoids impacting a student’s eligibility for federal financial aid. Because the payment goes directly to the institution, it is not considered income to the student and does not appear as a reportable asset on the Free Application for Federal Student Aid (FAFSA). Some educational institutions may still treat direct tuition payments as cash support, though recent FAFSA changes mean cash support is no longer counted as untaxed income.

Contributing to 529 Plans

Qualified tuition programs, commonly known as 529 plans, are a popular method for saving for education expenses due to their tax advantages. Contributions to a 529 plan are considered gifts for federal tax purposes. Individuals can contribute up to the annual gift tax exclusion amount, which is $19,000 per beneficiary in 2025, without triggering gift tax reporting requirements. Married couples can combine their exclusions, allowing a joint contribution of up to $38,000 per beneficiary in 2025.

For larger contributions, a special rule unique to 529 plans allows for a “superfunding” or “5-year gift averaging” election. This permits a lump-sum contribution of up to five times the annual gift tax exclusion, totaling $95,000 for an individual or $190,000 for a married couple in 2025, to be treated as if it were spread evenly over a five-year period. If this election is made, no further gifts can be given to that beneficiary during the five-year period without potentially incurring gift tax. The money within a 529 plan grows tax-deferred, and withdrawals are tax-free if used for qualified education expenses.

Qualified education expenses for 529 withdrawals are broad, encompassing tuition, fees, books, supplies, and equipment required for enrollment at an eligible educational institution. Room and board costs also qualify if the student is enrolled at least half-time, with limits tied to the institution’s cost of attendance. Additionally, 529 plans can be used for up to $10,000 per year in K-12 tuition expenses. Additional K-12 expenses like books, materials, and tutoring are also considered qualified expenses. Funds can also be used for certain apprenticeship programs and to repay qualified student loans, up to a lifetime maximum of $10,000 per individual.

The impact of 529 plans on financial aid eligibility, particularly for the FAFSA, has been a significant consideration. Previously, distributions from grandparent-owned 529 plans were reported as untaxed income to the student, potentially reducing financial aid eligibility. However, the FAFSA Simplification Act, effective for the 2024-2025 FAFSA cycle, introduced a notable change. Distributions from grandparent-owned 529 plans are no longer counted as untaxed income on the FAFSA.

When a 529 plan is owned by the student’s parent, its value is reported as a parent’s asset on the FAFSA. Parent-owned assets are assessed at a relatively low rate, minimizing their impact on financial aid eligibility. While the FAFSA no longer considers grandparent-owned 529 distributions as student income, some private colleges that use the CSS Profile for institutional aid may still consider these assets. Families applying to such schools should review their specific guidelines.

Using Custodial Accounts

Custodial accounts, established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), offer another way for grandparents to contribute to a grandchild’s financial future. These accounts are set up with an adult serving as custodian to manage assets on behalf of a minor. Once assets are placed in a UGMA or UTMA account, they are irrevocably the property of the minor. The child gains full control of the assets upon reaching the age of majority.

A key consideration for custodial accounts is the “Kiddie Tax” rule. Unearned income generated within these accounts, such as interest, dividends, and capital gains, is subject to specific tax treatment. For 2025, the first $1,350 of a child’s unearned income is tax-free. The next $1,350 is taxed at the child’s tax rate. Any unearned income exceeding $2,700 for 2025 is taxed at the parent’s marginal tax rate.

From a financial aid perspective, assets held in UGMA/UTMA accounts are reported as the student’s assets on the FAFSA. This can significantly impact financial aid eligibility because student assets are assessed at a higher rate compared to parent assets. While parent assets reduce aid eligibility by a smaller percentage, a student’s assets can reduce aid eligibility by up to 20% of their value.

Exploring Coverdell Education Savings Accounts

Coverdell Education Savings Accounts (ESAs) provide another tax-advantaged option for education savings. These trusts or custodial accounts are designed to pay for qualified education expenses, including both K-12 and higher education costs. Contributions to a Coverdell ESA are not tax-deductible. However, the funds grow tax-free, and withdrawals are tax-free if used for qualified education expenses.

There are specific limitations for Coverdell ESAs, including an annual contribution limit of $2,000 per beneficiary across all accounts. Income limitations also apply to contributors; for 2025, the ability to contribute the full amount phases out for single filers with a modified adjusted gross income (MAGI) between $95,000 and $110,000, and for married couples filing jointly with a MAGI between $190,000 and $220,000.

Qualified expenses for Coverdell ESAs are broad, similar to 529 plans, and explicitly include K-12 tuition, fees, books, supplies, equipment, academic tutoring, and special needs services. The funds in a Coverdell ESA must generally be used by the time the beneficiary reaches age 30, with exceptions for beneficiaries with special needs. If funds are not used by this age, the earnings portion becomes taxable and may be subject to an additional penalty.

Regarding financial aid, similar to 529 plans, the FAFSA Simplification Act brought changes for Coverdell ESAs starting with the 2024-2025 FAFSA cycle. Distributions from grandparent-owned Coverdell ESAs are no longer counted as untaxed income to the student. If the Coverdell ESA is owned by the student or a parent, the account’s value is reported as an asset on the FAFSA.