When planning for college expenses, it’s important to understand how financial aid and estate planning work together to impact the outcome. Below, we’ll outline the key ways asset ownership affects financial aid eligibility, share practical strategies to boost your chances of receiving aid, and explore estate planning tools that can safeguard your wealth while maximizing support for your child’s education.
FAFSA and Asset Ownership: The Basics
The FAFSA, or Free Application for Federal Student Aid, evaluates a student’s financial need by considering factors such as family income and assets. However, not all assets are treated equally under FAFSA rules. The ownership of those assets—whether by the parent, the student, or even a third party—plays a significant role in determining financial aid eligibility.
Here’s the deal: FAFSA considers up to 5.64% of parent-owned assets when calculating the Expected Family Contribution (EFC). But for student-owned assets, that percentage skyrockets to 20%. This means keeping assets out of your student’s name can greatly improve their chances of qualifying for financial aid.
To put it simply, parent-owned assets are less burdensome than student-owned ones. Take, for example, a savings account, investments, or a 529 college savings plan. If these assets are parent-owned, only 5.64% of their value is included in the EFC calculation.
However, if your child owns assets outright—such as those held in a UGMA or UTMA custodial account—they’ll be assessed at a much higher rate. For instance, if your child has $10,000 in one of these accounts, FAFSA will count $2,000 of it toward college costs. That’s a big hit.
What can you do? Unfortunately, you can’t legally change ownership of UGMA/UTMA accounts, as they belong to your child. But for future savings, consider alternatives like a 529 plan or a parent-owned investment account, which have less impact on financial aid.
And then there are third-party-owned assets. For example, if Grandma owns a 529 plan, FAFSA won’t count the asset itself. However, distributions from that plan will be treated as student income in the following year—and student income is assessed at up to 50%. If Grandma’s generosity isn’t carefully planned, it could significantly reduce your student’s financial aid package.
Estate Planning Meets FAFSA
Here’s where estate planning comes into play. By structuring your assets wisely, you can minimize their impact on financial aid. Let’s explore a few strategies:
1. Irrevocable Trusts
An irrevocable trust can be a valuable tool in estate planning, especially for removing assets from an estate for tax purposes. However, it’s important to understand how irrevocable trusts are treated under FAFSA rules. If a student or parent is a beneficiary of an irrevocable trust, it will be factored into the financial aid calculation.
Here’s how it works: The full value of the trust doesn’t need to be reported—only the beneficiary’s proportional share. Additionally, if the trust distributes income to the student, that income will be assessed at up to 50% for FAFSA purposes, which can significantly impact financial aid eligibility.
While irrevocable trusts have their advantages, they should be used cautiously when college financial aid is a consideration.
2. Retirement Accounts: Hidden Gems
Good news: FAFSA excludes assets held in qualified retirement accounts such as 401(k)s, IRAs, and Roth IRAs from its calculations. This makes retirement savings a win-win—you’re building a secure financial future for yourself in a tax-advantaged way while safeguarding your child’s eligibility for financial aid.
Pro tip: If you have extra savings that might count against you on FAFSA, consider putting those funds into your retirement account. This is a FAFSA-friendly strategy to lower your countable assets while boosting your retirement savings.
3. Pay Down Debt
Another smart strategy is to use liquid assets to pay down debt, such as your mortgage or student loans. Since FAFSA doesn’t factor in your home’s equity or your outstanding debt balances, this approach can lower your reportable assets while maintaining your overall financial health.
4. Timing Is Everything
FAFSA evaluates your financial situation based on the day you submit the form. This timing gives you an opportunity to make strategic financial moves to optimize your aid eligibility. For example, if you’re planning to sell an investment or receive a large bonus, consider delaying those actions until after you’ve filed FAFSA to avoid increasing your reportable assets or income for that year.
Practical Steps to Take Now
So, what can you do right now to prepare? Here are some actionable steps:
Review Your Assets: Make a list of all your family’s assets, including who owns them. Pay special attention to student-owned accounts and assets held in trusts.
Plan Ahead for Income Events: Be mindful of how bonuses, stock sales, or other income events could affect your FAFSA profile. If possible, defer these until after filing.
Shift Savings to FAFSA-Friendly Accounts: If you’re saving for college, prioritize 529 plans owned by you, the parent. Avoid putting large sums into custodial accounts.
Create a Life & Legacy Plan: Work with me to create a comprehensive Life & Legacy Plan that may include irrevocable trusts or other strategies to protect your assets and your financial aid eligibility.
Max Out Retirement Contributions: If possible, contribute to your 401(k) or IRA to reduce your countable assets while securing your financial future.
The Big Picture
Balancing estate planning with FAFSA eligibility can feel like a delicate act. You want to protect your family’s wealth and plan for your child’s future while maximizing the financial aid available to you.
By understanding how asset ownership affects aid and making strategic decisions, you can set your family up for success. Whether it’s reallocating assets, utilizing trusts wisely, or carefully timing financial moves, a thoughtful approach can make all the difference. When that acceptance letter arrives alongside a generous financial aid package, you’ll be glad you took the time to plan effectively.
How We Help
As your Personal Family Lawyer® Firm, we can help you create a comprehensive strategy that optimizes both education funding and wealth preservation goals. We’ll work with you to structure your assets effectively and ensure your plan adapts as the law changes, your assets change, or your family dynamics change. Our approach focuses on creating clarity and consistency across all aspects of your financial planning, from education funding to legacy preservation.
Book a call here to learn how we can help you create the right plan for your family:
*Please note that these information sessions are exclusively dedicated to Life & Legacy planning. If you need to schedule a consultation for other matters, please contact us here.
This article is a service of SG Law PLC, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Life & Legacy Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Life & Legacy Planning Session™.