Should I make tuition payments directly to my grandchild’s college or should I contribute to a 529 plan instead?
October 23, 2025
Direct payment of tuition to an educational institution is not considered a taxable gift. Therefore, you’re able to “give away” more than $19,000 per year (the annual federal gift tax exclusion) for your grandchild’s college education and not worry about gift taxes. However, colleges may reduce a student’s institutional financial aid by the amount of your payment. So before sending a check, ask the college how it will affect your grandchild’s eligibility for college-based aid.
With 529 plans, all contributions are considered gifts, so the federal gift tax exclusion comes into play. This exclusion lets you gift up to $19,000 per year per person (in 2025) without any gift tax or estate tax consequences. There is one exception. Under special rules unique to 529 plans, you can gift up to five times the annual gift tax exclusion — $95,000 in 2025 — and avoid gift tax if you elect on your tax return to treat the gift as if it were made evenly over a five-year period. Married grandparents can gift up to $190,000 this way. (Keep in mind that even if you go over these limits, you won’t necessarily owe gift tax. You must first use up your lifetime applicable exclusion amount before you’ll have to pay gift tax out-of-pocket). Grandparents must also be aware of the generation-skipping transfer tax, or GSTT, which is a tax imposed on a gift made to someone who is more than one generation below you.
Regarding financial aid, grandparent-owned 529 accounts do not need to be listed as an asset on the federal government’s financial aid application, the FAFSA. And starting with the 2024–2025 FAFSA, distributions (withdrawals) from grandparent-owned 529 plans will no longer be counted as student income. Students won’t be required to report any type of cash support. 529 plans offer an advantage over the direct payment of tuition: tax-free withdrawals from a 529 plan can be used to pay for items besides tuition, including room and board, books, and supplies.
You should also consider the possibility that you may not live long enough to pay your grandchild’s tuition in the future. If such a case, any general funds will be part of your taxable estate, and the money your grandchild needs for education may not be available after settling your estate. But if you contribute to a 529 plan now, your contributions are considered present interest gifts and are generally taken out of your estate. (An exception exists if you elect to spread a lump-sum gift over five years and you die during the five-year period. In that case, the portion of the contribution allocated to the years after your death will be included in your gross estate.)
Note:
Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options, underlying investments, and investment company, can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified education expenses. For withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/or tax professionals because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors.
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