Grandparents and College Savings

Brent O’Mara works with business owners and multigenerational families, and in the second kind of family the grandparents’ wish to pay for college usually arrives before anyone has asked what the rules are. The word that names the usual vehicle is a number. Investor.gov, the investor education site of the Securities and Exchange Commission, explains that a 529 plan takes its name from section 529 of the Internal Revenue Code, which authorizes what the law calls qualified tuition programs: tax advantaged savings plans sponsored by states, state agencies or educational institutions to encourage saving for certain educational costs. There are two kinds, prepaid tuition plans and education savings plans; every state and the District of Columbia sponsors at least one, and a group of private colleges sponsors a prepaid plan of its own. The SEC does not regulate the plans themselves.² Nebraska’s version is run from the state treasurer’s office. KETV reported in October 2013 that the treasurer, who serves as trustee of the Nebraska Educational Savings Trust, had launched a free online program for parents and grandparents on the state sponsored plan, which then held more than $3 billion in 206,000 accounts nationwide, more than 58,000 of them owned by Nebraskans.³

Figure

Nebraska's college savings plan in 2013

assets in the Nebraska Educational Savings Trust, and more

$3 billion

accounts nationwide

206,000

accounts with Nebraska owners, and more

58,000

Nebraska's place among states launching such an outreach program, after Tennessee

Second

The routes and the gift rules behind them

A grandparent who wants to help can own a 529 account, contribute to one the parents own, write a check to the student or the family, or pay the school directly, and the tax rules treat each differently. Kiplinger sets out the federal gift tax framework: a tax of 18 to 40 percent applies in principle to gifts made during the year, but the annual exclusion lets an individual give up to $19,000 in 2026 to any number of recipients without filing a gift tax return, and a married couple can give $38,000 per recipient; by its arithmetic, a couple with two married children and two grandchildren could give $228,000 in a year across those six people with no return to file. Gifts above the exclusion are reported on Form 709 but produce no tax until they exceed the lifetime estate and gift exemption, $15 million for each individual in 2026, up from $13.99 million in 2025. The same article notes the exception that matters most to grandparents: tuition paid directly to an educational institution, like medical care paid directly to a provider, is exempt from the gift tax altogether.⁴

Figure

The federal gift figures for 2026

annual exclusion per recipient, unchanged from 2025

$19,000

per recipient for a married couple giving together

$38,000

lifetime estate and gift tax exemption per individual

$15 million

the return filed when a gift to one person exceeds the annual exclusion

Form 709

The American Bar Association’s estate planning section explains why a grandparent’s gift sits in a special category. Federal law imposes a generation skipping transfer tax on transfers to grandchildren and more remote descendants that exceed the exemption, levied in addition to gift or estate tax, so that a family cannot avoid a round of transfer tax by skipping a generation; but annual exclusion gifts and direct payments to medical or educational providers are not counted against the exemption at all and can be made entirely tax free.⁵ The section also traces the exemption’s history, $5 million in 2011, indexed to $5.49 million by 2017, then doubled by Congress to a $10 million base that came to $11.18 million in 2018, and it notes that the exemption is portable between spouses.⁵ CNBC reported the 2025 figure of $13.99 million and recalled that the 2017 law had doubled the exemption with a scheduled expiry after 2025 unless Congress acted.⁶

The choice of route is a choice of rule. A direct tuition payment uses the education exception and touches neither the annual exclusion nor the lifetime exemption. A contribution to a 529 account is a gift to the beneficiary, measured against the $19,000 exclusion like any other, though the account can be owned by the grandparent, by a parent or by the student. Cash handed to the parents is a gift to the parents. Which of these a family prefers often has less to do with tax than with control, since the owner of a 529 account, not the beneficiary, decides when money comes out and can change the beneficiary to another family member, and the family that talks these choices through together, in the manner set out in the family meetings entry, tends to avoid duplicating one another’s plans.

Figure

How the federal exemption has moved

1. 01
   2011$5 million, the base amount Congress set and later indexed for inflation
2. 02
   2012 to 2017$5.12 million rising to $5.49 million with indexing
3. 03
   2018$11.18 million after Congress doubled the base to $10 million in December 2017
4. 04
   SpousesPortable between spouses since 2011, so a surviving spouse may use what the first did not

Financial aid and the question of ownership

The second set of rules belongs to the financial aid office rather than the tax code. The Wall Street Journal answered readers’ questions on the subject in 2019 and summarized the conventional view: many grandparents love helping with college costs, there can be advantages when the grandparent owns the 529 account, but it is generally considered better for the parents to own an account held for a dependent student, because grandparent funds can have a negative effect on the student’s eligibility for aid. One reader who held accounts for grandchildren asked whether transferring them to the parents would avoid that effect, whether the transfer would be a taxable gift, and whether the Ohio state deductions she had taken would have to be repaid, the shape the problem takes once accounts exist.¹ The reason the aid rules reward foresight is that the federal aid formula treats money differently depending on whose name it is in and when it is spent, so a gift that is identical in tax terms can differ, by the year and the owner, in its effect on an aid decision.

The gift also has to fit the rest of the estate. A large direct payment shrinks the grandparent’s eventual estate without using any exemption, and a 529 account owned by a grandparent remains the grandparent’s asset until spent. Families whose parents have remarried face the further complications described under blended families and estate plans, and the scale of what is passing between generations, of which tuition is one of the earliest pieces, is the subject of the great wealth transfer. The habits that the money will support are described under teaching children about money.

What remains unsettled is the ground itself. The lifetime exemption has been $5 million, $11.18 million, $13.99 million and $15 million within fifteen years, by the sources above, and the annual exclusion moves with inflation; the aid formula has its own revision cycle, which is why the Wall Street Journal’s advice was framed as the rules then in force. A grandparent choosing between a 529 account, a direct payment and a plain gift is aiming at moving targets, and the right choice turns on the family’s own circumstances and on the current year’s rules, so it is a job for qualified professionals in tax and financial aid rather than for any fixed rule in this entry.