It’s Fall: Custodial Accounts, 529 Plans And Paying For College

college quad

As the season turns and it starts to feel like Fall, many parents are either paying college tuition bills or worrying about paying them. Many of my clients have asked me how 529 college savings plans or custodial accounts are counted when colleges consider financial aid.

Here are the basic rules and a few strategic ways to use them.

Student’s assets are counted more heavily than parents’ assets by colleges. When a school analyzes family finances using the Free Application for Federal Student Aid (FAFSA), which most schools do, they count parental assets differently than those owned by students when they calculate how much a family should contribute towards college costs. When the schools calculate the Expected Family Contribution (EFC), they expect parents to contribute no more than 5.64% of their assets. But a student is expected to contribute 20% of their assets. That means that if a student is considered the owner of an asset, a school will expect that student to use more of it to pay for school than they would expect from a parent that owns the same amount of assets. So, any asset a student owns will reduce available financial aid more than any asset a parent owns.

Custodial accounts created for the benefit of children (CUTMA accounts) are considered a child’s asset. If a child has $10,000 in a custodial account, that will increase the Expected Family Contribution by $2,000 (20%). 529 college savings plans, however, whether owned by a child or a parent, are considered to be parental assets. That same $10,000 in a 529 plan, then, would only increase theExpected Family Contribution by $564(5.64%).

What to do? If your child has custodial accounts, consider moving these into custodial 529 Plans instead. A custodial 529 will still be ‘owned’ by your child legally, so you, as the parent, can’t change the beneficiary of that account, but it will be counted as a parental asset for financial aid purposes. That can make a big difference, since moving the money to a custodial 529 means that the Expected Family Contribution will be reduced by 14.36% (20-5.64) of the account’s value.

529 Plans owned by grandparents and other family members really impact financial aid, but indirectly. If a grandparent or other person sets up a 529 Plan for the benefit of child, none of those assets are reported on a student’s FAFSA. But, when a grandparent withdraws money from that plan to pay college expenses, that money will be counted as that student’s income in the next year’s FAFSA. And student income is assessed at 50%. So, if a grandparent withdraws $10,000 to pay for college, that will reduce that student’s eligibility for financial aid by $5,000 the next year.

What to do? If you are planning ahead, encourage grandparents and other generous family members to make gifts to 529 Plans owned by the student or by you–that way, the assets will only reduce financial aid by 5.64%. If you didn’t plan ahead (it happens), consider using the grandparent’s 529 Plan for the last year of college — that way, the withdrawals won’t have any affect on that current year’s financial aid calculation.

To learn more about saving for college, go to savingforcollege.com, that’s the first place I go when I need to get answers for clients about 529 Plan rules and other college related financial questions.