Families want to save for their children’s higher education, but they also want to maximize their child’s eligibility for financial aid. Under guidelines for federal aid, sometimes these goals conflict.
When it comes to how savings are counted when calculating federal financial aid, rules about asset ownership play a major role.
Under the Free Application for Federal Student Aid (FAFSA), up to 20% of assets controlled by the student are considered when determining financial aid. Parental assets, which include those of dependent children, are only counted at a factor of 5.6% toward what the family is expected to pay — the Expected Family Contribution (EFC).
Depending on the family’s financial situation, it may be more beneficial to save money in an account owned by the parent, such as a 529 college savings plan. Certain savings vehicles including UGMA and UTMA custodial accounts are considered assets of the child.
Another benefit of a 529 plan is that distributions for qualified expenses are not considered student-earned income and will not count against them in determining future financial aid.
Parental-owned assets may be more beneficial
A 529 plan owned by a grandparent or another person besides a parent is not currently included in the EFC calculation. However, these assets may appear on other financial aid forms such as the CSS Profile, which is used by many private institutions. Another point to remember is that when funds are withdrawn from a 529 plan that is owned by a grandparent or others, the disbursement is considered student-earned income in the following year’s financial aid form and could have a negative effect on financial aid.
A strategy to mitigate this impact is to wait to withdraw from grandparent-owned 529 plans until late in the junior or senior year when the final FAFSA forms are already filed. Or, just before the student enters college, change ownership of the 529 plan from grandparent to parent. The funds would still be included as assets of the parent, but have less impact. Changing ownership of the account would not trigger a gift tax. But if the beneficiary changed to a younger recipient, such as child to grandchild, then there would be generation-skipping transfer tax implications.
Because of the complexity of saving for college and seeking financial aid, it is important to meet with a financial advisor who understands a family’s particular situation. With differing guidelines for savings vehicles and financial aid procedures, a financial professional can help families try to avoid saving in a way that could hurt a child’s chances of receiving financial aid.