"Who owns what" affects your eligibility for financial aid. Here's how to factor in this reality when pursuing a college savings strategy.
Compared to the parent's assets, financial assets belonging to children have a far greater impact on a family's eligibility for financial aid.
Student and Parent Assets Are Counted Differently
Families must report assets owned by the parents and the child in their aid applications. Here's how colleges evaluate the assets you report on the Free Application for Federal Student Aid (FAFSA), and how they factor them into your financial aid.
- The child's assets count for more. Colleges will expect families to use up to 20 percent of the assets owned by a dependent student to pay for college. This is true even if the child's assets are funded by other people's money. On the bright side, a 529 account owned by a student is counted as a parent's asset.
- The parents' assets count for less. Colleges will expect parents to use up to 5.64 percent of their "unprotected" assets toward college.
- A portion of the parent's assets is protected. "Protected" assets are not counted at all. The exact amount protected depends on the number of parents and the age of the older parent.
Many private colleges use information from an additional aid application to allocate aid from their own resources. These colleges may count more assets, such as home equity and assets owned by divorced parents and siblings. (See sidebar.)
What's Counted As an Asset?
On the FAFSA, most money and property owned by the parent or the student is counted as an asset. These include savings and checking accounts, cash, the net worth of a business with over 100 full-time employees, a farm that is not the family's primary residence, investment accounts, non-retirement tax-deferred savings plans such as 529 accounts, tax-exempt interest income, tax credits, investment property, and many other types of assets. The family's primary residence and retirement savings are not counted.
Some Assets Are Not Counted but Still Affect Financial Aid
Retirement accounts. The FAFSA does not ask about the value of accounts designed for retirement, such as traditional and Roth IRAs, 401(k) plans, and pensions. But the untaxed contributions and income from these accounts must be reported on the FAFSA that covers the year in which the transactions occurred.
Assets held by others. You don't have to report assets intended for college but owned by others on the FAFSA. However, once the money is given to the student or spent on his or her behalf, you must report it as untaxed student income on next year's aid applications. Since student income is assessed at much higher rates than parent income, this "gift" could significantly impact the amount of aid the student is eligible for.
Transferring Assets Held in the Child's Name
Parents wanting to transfer assets held in the child's name should do so two years or more before the child starts college. Custodial accounts and trusts must remain in the child's name or transferred to an eligible 529 savings plan. Series I and EE savings bonds in the child's name can be transferred only if a parent originally purchased the bonds.
Moving investments, assets, and income around can be a minefield with substantial consequences on financial aid and taxes. In most cases, keeping ordinary investment accounts in the parents' names is the smartest move.