In General, 529 plans don’t have much of an effect on financial aid, but not all accounts are treated the same by the FAFSA.
Under previous rules you report parent-owned 529 plan balances on the FAFSA as parental assets, distributions from any 529 plan get reported as untaxed student income, and grandparent 529 plan balances don’t get reported at all. Untaxed income to a student might at first not seem like a big deal, but it can reduce aid eligibility by as much as 50% of the amount of cash support. For example, taking a $10,000 529 plan distribution to help pay for college can reduce a student’s aid eligibility by $5,000, under previous rules (that are changing).
The new, simplified FAFSA goes live on October 1, 2023, for the 2024-25 academic year. Under the new rules untaxed income distributed from a 529 plan will no longer be reported, making grandparent owned 529 plans an even better way to save for college. This is a new rule, however, so it’s important to keep an eye out for updates.