Understanding the New Grandparent Loophole for FAFSA

The 2023-2024 FAFSA application is due June 30, 2024. FAFSA, or the Free Application for Federal Student Aid, is a form utilized by universities across the country to determine whether a student is eligible for financial aid and loans. This year’s FAFSA has seen several changes in an effort to simplify the process for applicants. One of those changes is known as the ‘Grandparent Loophole’, which now makes college payments made by grandparents exempt from the form.

Previously, the FAFSA application counted grandparent contributions as untaxed student income under a 529 plan. A 529 plan is a great way to put money towards college and comes with benefits such as tax-free growth, but including this as ‘income’ negatively impacted a student’s ability to receive aid. Students were required to self-report their income and past rules determined that 50% of a student’s gross income over a certain amount (the 2022-2023 threshold was $7,040) could be used to pay for college. This means that a large contribution from a grandparent to a student’s 529 could severely impede their eligibility for aid.

The new system for the 2023-2024 application will take information directly from their tax returns through the IRS Data Retrieval Tool (DRT). As a 529 plan is not included on a student’s tax returns, any contributions made by grandparents will no longer impact students. This year’s application also cut down on the number of questions from 108 to less than 50 to further streamline the process.

Experts say the ‘Grandparent Loophole’ will benefit middle-class households the most by allowing more students to become eligible for aid. If you are interested in how much aid your student may receive this year, the FAFSA website now includes a calculator called the “Student Aid Index”, which estimates a student’s aid eligibility.