Planning Ahead for College Finances

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Forbidden Drive

I would like to supplement our 529 college savings accounts by opening an account – either investment or Roth IRA – in order to diversify savings vehicles for our kids to use for education or anything else, but I was concerned that having money in their names would limit their chances to qualify for financial aid. So, this question has been bouncing around in my head for a while: who’s name should the kids assets be under? Parent or child?

The answer: parents.

FAFSA FAFSA FAFSA

It’s recommended that all parents with kids in college complete the Free Application for Federal Student Aid (FAFSA) form every year to determine eligibility for financial aid. In this process, all parent and student assets are taken into account and magically calculated to determine your EFC: Estimated Family Contribution. The game here is to get your EFC as low as possible. 

Looking at assets, they are weighted differently. Assets in the child’s name — including a savings account, trust fund, or brokerage account — will count more heavily against the financial aid award than assets in a parent’s name.

Here’s a summary of how a family’s assets are weighted in calculating the Estimated Family Contribution.

FAFSA Chart.png

  • Student assets: 20%; these include savings and investment accounts and real estate
  • Student income: 50% (don’t work too hard, kids!)
  • Parents’ assets: 2.6% – 5.6%; these include savings and investment accounts, real estate, etc., and is based on a sliding scale
  • Parents’ income: 22-47%; based on a sliding scale

*Not included here is gifts used towards tuition – these can count for 50% – 100%.

Student Income and Assets

A student’s savings account can have a big impact on the EFC, but there is an income protection allowance of $6400 (as of this writing in May 2019).

It is advised to have a parent as the owner of a child’s 529 account with the child as the beneficiary so the account is considered a parent’s asset (weighted up to 5.6% vs student asset at 20%) and therefore more favorable in the eyes of FAFSA. There are other nuances around using 529s that should be considered, like what defines education-related expenses, accounts owned by grandparents, etc.

Parents’ Income and Assets 

The biggest impact in the financial aid equation is parents’ income. While no one typically wants to lower their income intentionally,  here are a few things you can do to limit it during college tuition payment times:

  • Avoid large dividends, capital gains, distributions from a mutual fund or withdrawals from a retirement account – any income reported on Form 1040
  • Defer your work bonus (if you can)

Your income is calculated based on your two years of income before the start of the academic year, so start minimizing your income after January 1 of your child’s sophomore year of high school.

As for typical assets in the FAFSA equation:

  • Home equity in a primary home does not count as an asset, but equity in a second home or investment property does count
  • The cash values of whole life insurance policies and annuities are not considered in the FAFSA calculation
  • The value of a family business is not counted on FAFSA if more than 50% is owned and controlled by your family and has less than 100 full-time employees.
  • Parents’ 401(k), Roth IRA and traditional IRAs are not counted in calculating your EFC. (You can withdraw from a Roth IRA penalty-free to pay for college, but the amount you withdraw is considered untaxed income on the FAFSA.)

In Summary

There are quite a few resources out there with more detail and tips on reducing your EFC, like on Road2College. This is also discussed in the context of post-retirement income and FAFSA in this ChooseFI interview with Root of Good.

Separately, the College Scholarship Service (CSS) form is used to determine your eligibility for non-government financial aid, such as a school scholarship and grants. The considerations for CSS differ from FAFSA.

With this, we realized that our two 529 accounts were already set-up in our names with each individual child as the beneficiary (my father-in-law set these up and is way ahead of me here), so we’re set there and will continue to contribute to these accounts to take advantage of the tax savings.

We have also opened Vanguard investment accounts for each child for the occasional deposit when their traditional savings accounts reach a certain threshold. Soon enough, these will be invested in VTSAX.

I hope that compiling what I’ve learned here has helped demystify this a bit – it’s helped us to dig in and learn more about this even though we’re still seven years away. It’s good just to keep the rules of the game in mind as we continue to save and invest.

Related post: Retire Early and Pay for College … is it Possible?

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