Most families save for college in a variety of ways, using different accounts.
Ownership of those accounts is an important consideration when students are applying for federal financial aid. Part of the calculation for determining the Expected Family Contribution (EFC) is determining whether an asset is owned by the parent or the child.
Generally, parent assets are treated more favorably than child assets for purposes of financial aid — 20% of the child’s assets are taken into account for purposes of calculating the EFC, while a maximum of 5.64% of parent assets is considered.
Flexibility of 529 plan ownership
Of the various ways to save, 529 savings plans have tax advantages and benefits like flexibility of ownership, which may help students optimize their financial aid eligibility.
College savings accounts such as the 529 plan or Coverdell Education Savings Accounts (ESAs) are considered parent assets, unless owned by a non-parent.
When applying for federal aid, non-parent-owned assets, such as a 529 owned by a grandparent, are not taken into consideration as part of the asset test. A distribution from a grandparent-owned account, however, would count as income for the student and have an impact on the income calculation.
Planning strategies around account ownership
Here are some planning strategies that families can use to help deal with the asset-ownership issue.
- When a student is the beneficiary of a 529 savings plan owned by a grandparent or other non-parent relative, consider transferring ownership to the parent before filing for financial aid. At that point, the account would be reported as a parent asset, but it would be weighed less in the EFC asset test calculation than it would be if it were considered a distribution reported on the income test.
- Avoid tapping into a grandparent-owned account in the early years of college. (Beginning with the 2017-2018 FAFSA [Free Applications for Federal Student Aid], the base year for student and parent income will be the calendar year two years prior.) During that time, spend down the parent-owned 529 plan first or tap into other sources.
- Spend down an UGMA/UTMA first, even before college, since assets are considered owned by the child, which is more detrimental for financial aid.
- Use UGMA/UTMA funds for expenses that are not considered “qualified college expenses” when using a 529 plan, such as transportation.
- Consider spending down 529 assets in bulk “early” versus spreading them out evenly over four years, and supplementing them with other funds or loans. If the 529 is spent early, it may incrementally improve the chances for the student receiving additional financial aid in later years.
- If there’s a chance the child may receive a scholarship in later college years, spend down a 529 college plan. But don’t if there are other, younger children because account owners may change the beneficiary to other family members in the future.
There are additional calculations that influence student aid eligibility, including income. As important as it is to save for college, it is critical to have a plan for spending down those savings. For more details on financial aid, planning, and tax considerations, read our investor education article, “Strategies to make the most of college savings.”