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.
Impact of Savings in the Student’s Name vs. Savings in the Parent’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.
Shift Assets from Student to Parent to Reduce Impact on Aid Eligibility
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.
- Roll the custodial account into a custodial 529 College Savings Plan account. Since July 1, 2009, custodial 529 plan accounts owned by a dependent student have been treated as though they were a parent asset on the FAFSA. Contributions to a 529 plan must be made in cash, so this will require liquidating any investments in the child’s name. Since that may result in capital gains, it is best to liquidate the child’s investments two or more years prior to the child enrolling in college.
- Shift the child’s money into the parent’s name. Legally, the money is the property of the child, so the parents cannot simply move the money into their bank accounts. A minor child does not have the legal capacity to gift the money to his or her parents. It is best to consult with an accountant or financial planner about the proper way to shift the money. One approach is to spend the child’s money for the child’s benefit instead of using the parents’ money. For example, if the child needs a SAT or ACT test prep class, a dorm refrigerator and microwave oven, a computer for school or a car to commute to college, pay for it with the child’s money before filing the FAFSA. (Note, however, that college students may be able to qualify for a discount on computer equipment once they enroll in college.)
- Spend down child assets to pay for college before touching parent assets. This will prevent the child’s assets from affecting eligibility for need-based financial aid in subsequent years. Parents sometimes want to spread out the child’s money evenly over all four years, making up the difference with the parents’ money, which yields a higher Expected Family Contribution (EFC) than using up the child’s money first. Spending the child’s assets first can increase eligibility for need-based financial aid.