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Student assets are assessed at a greater rate than parent assets on financial aid application forms. For example, the Free Application for Federal Student Aid (FAFSA®) bases the expected family contribution (EFC) on 20% of student assets but at most 5.64% of parent assets. So, it is always best to save for college in the parent’s name, not the child’s name.
Dependent student assets are assessed at a flat 20% rate, so $10,000 in the student’s name will reduce eligibility for need-based financial aid by $2,000.
In contrast, a portion of parent assets are sheltered by an asset protection allowance based on the age of the older parent living in the student’s household. The asset protection allowance is between $30,000 and $60,000 for most parents of college-age children. The net worth of the family’s principal place of residence, money in qualified retirement plans and the net worth of small businesses owned and controlled by the family (with less than 100 full-time equivalent employees) are not reported as an asset. Any remaining reportable assets are assessed on a bracketed scale, with a top rate of 5.64%. In a worst-case scenario, $10,000 in the parent’s name will reduce the student’s eligibility for need-based financial aid by $564, an improvement of at least $1,436 in eligibility for need-based financial aid.
If the child has some money in a custodial account, such as a Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) bank or brokerage account, there are several possible approaches to reducing the impact on eligibility for need-based financial aid.
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