If a qualified college savings plan is reported as a parent asset on the Free Application for Federal Student Aid (FAFSA), there is a slight reduction in eligibility for need-based financial aid. The savings penalty is much more severe if the college savings plan is reported as a student asset on the FAFSA or if the college savings plan is not reported as an asset on the FAFSA.
A qualified college savings plan, such as 529 college savings plans, prepaid tuition plans and Coverdell Education Savings Accounts, can affect a student’s eligibility for need-based financial aid either as an asset or as income. If a college savings plan is reported as an asset on the FAFSA, qualified distributions are not reported as untaxed income on the FAFSA. If a college savings plan is not reported as an asset on the FAFSA, then qualified distributions are reported as untaxed income to the beneficiary (the student) on the subsequent year’s FAFSA. In both cases, non-qualified distributions are included in the beneficiary’s adjusted gross income (AGI).
Whether a college savings plan is reported as an asset on the FAFSA depends on who owns the college savings plan account, not the beneficiary.
Non-qualified college savings plans, such as bank accounts, brokerage accounts and other investments, are reported as assets of the account owner. This includes custodial accounts, such as Uniform Gift to Minors (UGMA) and Uniform Transfer to Minors (UTMA) accounts, which are reported as student assets if the student is the account owner.
Certain assets, such as qualified retirement plan accounts (e.g., a 401(k), 403(b), traditional IRA, Roth IRA, SEP, SIMPLE and KEOGH plans, pensions and annuities), are not reported as assets on the FAFSA, although employee contributions to qualified retirement plans during the base year are reported as untaxed income on the FAFSA. But like other assets that are not reported on the FAFSA, any distributions will be treated as taxable or untaxed income to the beneficiary. For example, although a return of contributions from a Roth IRA may be tax free, the distribution must be reported as untaxed income to the beneficiary, potentially having a harsh impact on eligibility for need-based financial aid.
The impact on eligibility for need-based aid depends on whether the college savings plan is reported as a student asset or parent asset on the FAFSA, as illustrated in this table. Student assets reduce aid eligibility by 20% of the net asset value. Parent assets reduce aid eligibility on a bracketed system that ranges from 2.64% to 5.64% of the net asset value. If a college savings plan is not reported as an asset on the FAFSA, then aid eligibility on the subsequent year’s FAFSA will be reduced by up to 50% of the amount of any distributions from the college savings plan.
| Account Owner | Treatment of Assets | Treatment of Qualified Distributions | Treatment of Non-Qualified Distributions |
|---|---|---|---|
| Dependent Student | Parent Asset | Ignored | Taxable income to beneficiary |
| Parent of Dependent Student | Parent Asset | Ignored | Taxable income to beneficiary |
| Independent Student | Student Asset | Ignored | Taxable income to beneficiary |
| Grandparent and everybody else | Ignored | Untaxed income to the beneficiary | Taxable income to beneficiary |
For example, suppose $10,000 is distributed from a $10,000 qualified college savings plan:
Thus, college savings plans that are reported as parent assets on the FAFSA have the lowest impact on aid eligibility, followed by college savings plans that are reported as student assets and college savings plans that are not reported as assets. So even though a grandparent-owned 529 plan or a Roth IRA is not reported as an asset on the FAFSA, any distributions will be reported as taxable or untaxed income on the FAFSA and will have a harsh impact on eligibility for need-based financial aid.
In some cases, college savings plans will have no impact on aid eligibility despite being reported as assets on the FAFSA. A portion of parent assets are sheltered from need analysis, based on the age of the older parent. This asset protection allowance is typically $30,000 to $60,000 for most parents of college students. Students and parent assets may be disregarded entirely if the FAFSA qualifies for the simplified needs test. The simplified needs test requires the parents to have adjusted gross income (AGI) less than $50,000 and to either be eligible to file an IRS Form 1040A or 1040EZ (or income below the IRS filing thresholds) or someone in the household must have qualified for certain means-tested federal benefit programs during the last two years.
If a college savings plan is not reported as an asset on the FAFSA, there are a few workarounds that can potentially reduce the impact on aid eligibility:
If a college savings plan is reported as a student asset on the FAFSA, there are a few workarounds that can potentially reduce the impact on aid eligibility:
Note that if parent assets are high enough to eliminate a student’s eligibility for need-based federal grants, in most cases the parent income is high enough to eliminate aid eligibility even if assets were disregarded. Less than 4 percent of dependent students eligible for the Federal Pell Grant have a contribution from parent assets on the FAFSA.
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