Student's FAFSA for senior year (2016-2017) will be based on 2015 income (in other words, the prior year). Starting with the 2017-2018 academic year, FAFSA will be based on prior-prior year, so will again use 2015 income. Any distribution from a grandparent owned 529 in 2015 will need to be reported on your student's FAFSA for the senior year (2016-2017) as untaxed income.
An existing parent owned 529 should already have been reported on FAFSA as a parent asset. Distributions from a parent owned 529 will not count as income, and as the 529 is used its value will likely decline meaning less of a potential asset hit on FAFSA.
Note that distributions from a grandparent owned 529 are considered untaxed income to the student for FAFSA purposes; qualified distributions are not reported as income to the student on student tax forms.