Authorities say SanJuanita Carbajal gave cocaine to the 9-year-old child, told her to go to her elementary school and present the drugs to school officials.
The idea behind the plot, according to police, is that the child would claim the drugs belonged to her father, and Carbajal would then gain custody of the child.
In a jailhouse interview, the grandmother proclaimed her innocence.
"I love my granddaughter too much to do have done anything, or to do anything like that to her," Carbajal said. "Children have always been special to me, and with this allegation I may never be able to be around children again."
Under questioning, the 9-year-old first said the drugs belonged to her father, but then admitted they came from her grandmother.
Carbajal was arrested Wednesday. She is being charged with child endangerment. Police did not immediately know Thursday if she had a lawyer
The Associated Press contributed to this report.