Are UGMA and UTMA Accounts Reported as Investments on the FAFSA?
May 28, 2012
One solution is to spend down the balance in the UTMA account to pay for the student’s college education. This will reduce the impact of the UTMA account on eligibility for need-based financial aid next year. The family should spend the student’s assets to pay for the student’s education before using any parent assets. If the family spends down the UTMA account balance to zero, it will reduce the EFC by as much as $6,000.
Another solution is to roll the money into a custodial 529 college savings plan account. A custodial 529 plan is titled the same as the original UTMA account that was used to fund the 529 plan. Even though the student is the account owner (and beneficiary) of a custodial 529 plan, federal law treats such accounts as though they were parent assets on the FAFSA. This yields a much more favorable treatment on the FAFSA, reducing the impact of the $30,000 account from at most $6,000 to at most $1,700.
(Note that some financial planners have encouraged families to set up 529 plans with a grandparent as the account owner, as opposed to the student or parent, because accounts owned by a grandparent are not reported as assets on the FAFSA. However, if a 529 plan is not reported as an asset on the FAFSA, any distributions from the 529 plan must be reported as untaxed income to the beneficiary on the subsequent year’s FAFSA. That usually results in a much greater increase in the student’s EFC than a 529 plan owned by the student or parent. If a 529 plan that is reported as an asset on the FAFSA, distributions are not reported as income on the FAFSA.)
Addressing the child support and UTMA account issues will reduce the EFC to about $14,000. This is still too high an EFC for the student to qualify for a Pell Grant, but the student might qualify for a subsidized Stafford loan and perhaps some other aid from the college’s own funds, depending on how much the college costs.