When it comes to how eligibility for financial aid is evaluated, having a grandparent as the owner of a 529 account could have a small advantage in the amount of aid your child is offered over having account owned by a parent.  A 529 account owned by a grandparent (or an aunt or uncle, or anyone other than the student and the student’s parents) is not included as part of the family financial information currently requested to evaluate federal financial aid awards.  Keep in mind that individual institutions may develop their own guidelines for evaluating eligibility for non-federal aid.  The evaluation of a student’s financial need is largely based on information submitted on the U.S. Department of Education’s Free Application for Federal Student Aid (FAFSA).  Only parents’ and students’ financial information is reflected in the FAFSA documentation. 

The question of how distributions from an account owned by a grandparent impact the financial aid calculation should be considered.  Withdrawals from the account to pay for qualified expenses are tax-free without regard to who owns the account.  The issue is how the distribution is treated on the FAFSA forms when funds come from an account not owned by the student or the parent.   In 2004 the Department of Education (DOE) made it clear that tax-free withdrawals from 529 accounts owned by the student or parent do not get recognized as income on the FAFSA form.  There remains some question among industry and tax professionals as to the certainty of the treatment of distributions from third party owned accounts regarding financial aid calculations.  Until the DOE provides clear guidance the question would likely be dealt with at the individual financial institution.

In some cases it may be a planning consideration to periodically rollover assets from an account owned by grandparents to a 529 account controlled by the student from which distributions are made to pay for college expenses.