Family Incorrectly Reported 529 Plan as a Student Asset on the FAFSA
March 12, 2012
I have two questions which I assume you’ve been asked a million times and I just want to make sure I’m understanding the write-ups about them correctly. We have a regular UGMA/UTMA savings account for our daughter where we are the custodian. In the FAFSA application, should this be entered under the student or the parent? Am I assuming correctly that a regular 529 plan will be entered under the parent asset in the FAFSA application? Last year I reported both the 529 plan and the UGMA/UTMA under the student’s net worth on the FAFSA. Our family income was about $75,000 and yet our EFC was about $15,000. The only assets we have other than retirement plan accounts are the UGMA/UTMA account and the 529 plan. This year we will be filling out our third year of FAFSA. Now I’m wondering if we’ve been filling out our FAFSA app correctly. — W.S.
A $15,000 EFC on $75,000 in family income and minimal assets is too high. The federal need analysis formula is harsh, but not that harsh. The most common causes of an unusually high EFC as compared with parent income (i.e., an EFC that is 20% or more of parent income for parent income under $100,000) are high student income or high student assets.
Regular UGMA/UTMA accounts, such as custodial bank and brokerage accounts, are reported as student assets on the Free Application for Federal Student Aid (FAFSA). 529 college savings plan accounts, on the other hand, are reported as a parent asset if the student is a dependent student, regardless of whether the 529 plan account is owned by the student or the parent.
The following is the relevant excerpt from the FAFSA instructions:
Investments also include qualified educational benefits or education savings accounts (e.g., Coverdell savings accounts, 529 college savings plans and the refund value of 529 prepaid tuition plans). For a student who does not report parental information, the accounts owned by the student (and/or the student’s spouse) are reported as student investments in question 41. For a student who must report parental information, the accounts are reported as parental investments in question 89, including all accounts owned by the student and all accounts owned by the parents for any member of the household.
Unfortunately, reporting a 529 plan as a student asset on the FAFSA is a common error. Parents sometimes assume that the 529 plan should be reported as a student asset because the student is the beneficiary. Always read the instructions carefully. Congress changed the Higher Education Act of 1965 effective starting with the 2009-10 award year to treat the 529 plans as though they were a parent asset.
Parent assets are treated more favorably than student assets on the FAFSA. The FAFSA ignores qualified retirement plans (e.g., traditional and Roth IRAs, 401(k) and 403(b) accounts and pensions), the net worth of the family home and any small businesses owned and controlled by the family. An asset protection allowance shelters a portion of parent assets, typically $45,000 to $50,000. Any remaining parent assets are assessed on a bracketed scale that runs from 2.64% to 5.64%. This is in contrast with student assets, which reduce aid eligibility by 20% with no asset protection allowance.
Errors on the FAFSA may be corrected at any time. Incorrectly reporting a 529 plan as a student asset is considered to be an error. It is best to notify the college financial aid office before making a correction to the FAFSA, since otherwise the college financial aid administrator may disallow the change. Since the award year has not yet ended, the error should be corrected on both this year’s and last year’s FAFSAs. Depending on the college’s financial aid policies and contingency funds, the college might be able to increase this year’s financial aid package to reflect the increase in aid eligibility after the error is corrected.
Reporting the UGMA/UTMA account as a student asset, on the other hand, is correct. Information that is correct as of the date the FAFSA was filed cannot be updated to reflect subsequent changes.
If the family has not yet filed the FAFSA, they could liquidate the UGMA/UTMA account and invest the proceeds in a custodial 529 plan account before filing the FAFSA. (With a traditional 529 plan account, the parent is the account owner and the student is the beneficiary. With a custodial 529 plan account, the student is both the account owner and the beneficiary.) The money would then be treated as though it were a parent asset. The family could also spend the student’s money on college costs before filing the FAFSA (i.e., instead of using the money in the existing parent-owned 529 plan or other parent assets). But once the FAFSA is filed, the FAFSA cannot be updated to reflect a change in the nature of the student’s assets.
It may still be worthwhile to address the student’s assets for the benefit of next year’s FAFSA. Otherwise those assets will hurt the student’s eligibility for need-based financial aid for an additional year.