Back > College Planning  > Paying for College: The FAFSA Now Has a ‘Grandparent Loophole

Paying for College: The FAFSA Now Has a ‘Grandparent Loophole

Accessing financial aid is increasingly vital for many American families when financing a college education. The first step for most college-bound students is to complete the Free Application for Federal Student Aid (FAFSA) to unlock various forms of assistance.

“As students wait to learn how much they can expect to pay for college next year, many find themselves grappling with uncertainty and frustration,” says Daniel Lerner, Executive Vice President, Investment Services at David Lerner Associates.

“This year, in particular, has proven to be especially challenging, with delays and glitches in processing the new FAFSA financial aid form, leaving millions of families in limbo,” states Lerner.

However, there may be a silver lining for those seeking aid and receiving support from grandparents.

Out with the Old…

Under the old FAFSA rules, determining student aid encompassed numerous factors, such as household size, the number of college-enrolled children, and diverse income sources (including assistance from grandparents), that affected the student’s financial aid eligibility.

However, thanks to FAFSA simplification, these questions about financial contributions from grandparents have been eliminated from the FAFSA form. This significant shift has transformed what was once perceived as a “grandparent trap” into a valuable opportunity for families.

How Does the Grandparent Loophole Work?

The revised FAFSA employs a streamlined calculation termed the “Student Aid Index” to approximate a family’s affordability for college expenses.

Now, assistance from grandparents will no longer count against students during the financial aid assessment process, potentially resulting in thousands of dollars in additional aid.

While this change may initially seem unfair to some, it is important to understand the rationale behind it. The 2020 FAFSA Simplification Act aimed to simplify the FAFSA form, making it more accessible to low-income families and reducing the likelihood of errors in reporting. The new form reduces the number of questions from 108 to 50. The updated FAFSA utilizes data directly obtained from the IRS Data Retrieval Tool (DRT), significantly diminishing the likelihood of errors.

529 College Savings Plans

One common approach for grandparents who want to support their grandchildren’s college education is establishing a 529 college savings plan.

In recent years, restrictions on eligible educational expenses under 529 plans have been relaxed, and they now encompass continuing education classes and apprenticeship programs.

These plans accrue tax-free growth over time, and you incur no taxes upon using the funds for eligible educational purposes. Additionally, in more than 30 states, contributors receive a state tax deduction when making deposits into the plans.

Whole Life Insurance: A Better Choice?

While 529 college savings plans are a popular option, offering tax-free growth and state tax benefits in many states, they’re not without cons. It’s important to note that the grandparent owns and manages the college savings account, and this may potentially impact their Medicaid eligibility.

Additionally, colleges might still consider contributions from grandparents for nonfederal institutional aid through the CSS Profile.

Whole life insurance policies can provide additional flexibility and benefits. Unlike 529 plans, which are restricted to education expenses, whole life insurance policies offer accumulated assets that can be used for various purposes, including college expenses, paying off student loans, starting a business, or purchasing a home.


Every family’s financial situation is unique, and David Lerner Associates is here to provide personalized guidance and support. Whether you’re a grandparent, parent, or student, we’re committed to helping you achieve your financial goals and secure a bright future.

Contact us today to learn about how we can help you navigate the complexities of college financial aid and plan for a successful future.

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Your Investment Counselor

Skip to content