A family loan for college no longer has to hurt financial aid the way it used to. Since the FAFSA Simplification Act took effect for the 2024-25 award year, cash support and money paid on a student's behalf, including help from a grandparent or non-custodial parent, is no longer reported as untaxed income on the FAFSA. That single change quietly reversed what financial aid advisors used to call the "grandparent trap," and the rule still applies for the 2026-27 FAFSA cycle.
But "no longer counted as income" is not the same as "no effect at all." A family loan can still shrink a student's aid package if the cash is sitting in the wrong account on the day the FAFSA gets filed, and private colleges that use the CSS Profile ask about relative help directly. Here is what actually changes your numbers, and what to do before you write the check.
Does a family loan count as income on the FAFSA?
No. Under the current FAFSA formula, money a relative lends or gives to pay for a student's education is not reported as untaxed income, regardless of whether it comes from a parent whose information is already on the form or from a grandparent, aunt, uncle, or family friend who isn't. The National Association of Student Financial Aid Administrators (NASFAA) confirms that cash support and money paid on a student's behalf were removed from the untaxed income section starting with the 2024-25 award year, and the same treatment carries into the 2026-27 FAFSA.
Before this change, a grandparent who handed a grandchild $20,000 for tuition, or who withdrew funds from a grandparent-owned 529 plan, could trigger a FAFSA question that treated the money as the student's untaxed income. Because student income is assessed far more aggressively than parent income in the aid formula, that single transfer could cut a student's eligibility by a meaningful share of the amount received. The 2024 rule change eliminated that specific question. A loan from Grandma now sits in the same reporting category as a gift from Grandma: neither one shows up as income.
The asset-timing trap nobody mentions
Removing the income question did not remove the asset question. If loan proceeds are still sitting in the student's checking or savings account on the day the FAFSA is filed, that balance counts as a student asset, and student assets are assessed far more harshly than parent assets in the Student Aid Index (SAI) formula. Twenty percent of a student's reportable assets count toward the SAI, with no protection allowance at all. Parent-held assets also lost their old protection allowance, but they're still assessed at a much lower rate than money sitting directly in the student's name, so where the cash sits when you file matters as much as whose name is on the loan.
A $25,000 loan that a sophomore has already spent on tuition, a laptop, and a semester's rent by the FAFSA filing date shows up nowhere. The same $25,000 sitting untouched in the student's account on filing day adds roughly $5,000 straight onto the family's calculated contribution. The fix is sequencing, not avoidance: time the transfer close to when the money is actually needed, or route it through the parent's account and pay the school directly, rather than parking it in the student's name for months.
| Reported as untaxed income? | Reported as an asset if still unspent on filing day? | |
|---|---|---|
| Pre-2024 FAFSA: grandparent loan or gift | Yes, as the student's untaxed income | Yes |
| 2026-27 FAFSA: grandparent loan or gift | No | Yes, same as any other cash the student holds |
| CSS Profile schools (if applicable) | Reported separately as relative assistance | Per that school's own policy |
Make it a real loan if you want it to hold up at tax time
The FAFSA doesn't ask whether family money was a loan or a gift anymore, but the IRS still does, and getting that distinction wrong creates a separate problem. A transfer that is informally called a "loan" with no paperwork, no interest, and no expectation of repayment looks like a gift to the IRS, which matters once the amount crosses the annual gift tax exclusion. For the broader tradeoffs of using family money for tuition at all, not just the FAFSA mechanics, our complete guide to family loans for college covers repayment structures and what to put in writing before the first check goes out.
To keep a family education loan a loan:
- Charge interest at or above the Applicable Federal Rate (AFR) for the month you originate the loan and the term you choose. Below-market loans over $10,000 can trigger imputed interest rules even between relatives. Family Loan Tracker's AFR and minimum interest calculator always shows the current month's published rates, so you're not relying on a number that's already gone stale.
- Put it in writing. A signed promissory note with a principal amount, interest rate, and repayment schedule is what separates a bona fide loan from a cash gift in the eyes of both the IRS and a financial aid administrator exercising professional judgment. You can create a free loan agreement in a few minutes rather than drafting one from scratch.
- Actually collect payments. A loan that never gets repaid, with no records showing anyone tried, reads as a gift no matter what the paperwork says. Use Family Loan Tracker to log every payment, so there's a record if anyone, the IRS or a financial aid administrator exercising professional judgment, ever asks for one.
If the amount is large enough to raise generation-skipping tax questions on top of the gift tax ones, for example a grandparent funding several years of tuition in one transfer, see our guide on loans to grandchildren and the generation-skipping tax before you set the terms.
What changes if the school uses the CSS Profile
Roughly 200 private colleges and a handful of state scholarship programs use the College Scholarship Service (CSS) Profile in addition to or instead of the FAFSA, and the CSS Profile asks a direct question the FAFSA no longer does: how much the student expects to receive from relatives other than their parents to help pay for college. Schools that collect this answer can factor it into their own institutional aid formula, separate from federal Title IV aid.
That means a family loan that's invisible to the federal SAI calculation can still be visible to a CSS Profile school's financial aid office. If your student is applying to any CSS Profile school, check that school's specific policy on relative assistance before assuming the FAFSA rule change covers you everywhere.
A worked example
Say a grandmother wants to lend her grandson $30,000 toward his junior and senior year at a state school that only requires the FAFSA.
She structures it as a loan: a signed promissory note, interest at the current AFR, and a four-year repayment schedule starting after graduation. She disburses $15,000 each year, timed to arrive a week before each semester's tuition bill rather than sitting in his account over the summer. On the FAFSA, none of it appears as untaxed income under the current rules, and because it's spent down before each filing date, little to none of it shows up as a reportable asset either.
Compare that to handing him the full $30,000 in one lump sum the summer before junior year with no note and no interest. The same dollar amount now risks two separate problems: a chunk of it sitting as a student asset on two consecutive FAFSAs, assessed at 20% each year, and an informal transfer that looks like a gift if the IRS ever asks.
The bottom line
The FAFSA stopped punishing family loans and cash gifts from relatives starting with the 2024-25 cycle, and that rule holds for 2026-27. What it didn't change is how assets are counted, how private colleges ask their own questions, or what the IRS expects when a "loan" shows up between relatives. Treat the FAFSA change as one less thing to worry about, not the only thing. Document the loan properly, time the disbursement to when the money is actually needed, and check each school's own forms before you assume one federal rule covers every application on the list.
This is general information, not personalized financial aid or tax advice. Confirm your specific situation with the school's financial aid office and a tax professional before transferring a large sum.
