College Prowler $2000 No Essay Scholarship - Appy Now!
Print

Financial Aid >> Browse Articles >> Expert Financial Aid Advice

Financial Aid >> Browse Articles >> FAFSA

Financial Aid >> Browse Articles >> Saving for College

+3

Confusion about Reporting Custodial 529 College Savings Plan Accounts on the FAFSA

Mark Kantrowitz

December 31, 2012

When the student’s parents are divorced, only one of them is responsible for completing the FAFSA. This parent is the one with whom the student lived the most during the 12 months ending on the FAFSA application date (or failing that, the parent who provided the most support). This parent is referred to as the custodial parent, and the other parent as the non-custodial parent. Only the custodial parent’s income and assets (plus the step-parent’s income and assets, if the custodial parent has remarried) must be reported on the student’s FAFSA. The non-custodial parent’s income and assets are ignored.

(The word “custodial” has different meanings when referring to a 529 plan account and to the parent responsible for completing the FAFSA, adding to the potential for confusion.)

It does not matter whether the custodian on a custodial 529 plan account is the custodial parent or the non-custodial parent. With a custodial 529 plan, the custodian is a placeholder for the student, not the account owner. The custodial 529 plan account is owned by the student, and if the student is a dependent student, treated as an asset of the parent who completes the FAFSA.

This is in contrast with a scenario in which the non-custodial parent is the owner of a 529 college savings plan account and not just the custodian on a custodial 529 college savings plan account. When the non-custodial parent owns a 529 plan, that 529 plan is not reported as an asset on the student’s FAFSA, but any distributions from such a 529 plan are reported as untaxed income to the student. This can have a severe negative impact on the student’s eligibility for need-based aid. There are two effective workarounds. One involves changing the account owner from the non-custodial parent to the custodial parent. The other involves waiting until the student’s senior year in college to take a distribution from the 529 plan account, when there will be no subsequent year’s FAFSA to be affected.

To summarize:

  • If the custodial parent owns a 529 plan account, it is reported as a parent investment asset on the student’s FAFSA and distributions from this 529 plan account are ignored. This is regardless of whether the student or someone else is the beneficiary.

  • If the non-custodial parent owns a 529 plan account with the student as the beneficiary, it is not reported as an investment asset on the student’s FAFSA, but any distributions are reported as untaxed income to the student on the subsequent year’s FAFSA.

  • If a dependent student owns a custodial 529 plan account, it is reported as though it were the custodial parent’s asset on the student’s FAFSA, regardless of whether the custodial parent or the non-custodial parent is the custodian on the custodial 529 plan account.

  • If an independent student owns a custodial 529 plan account, it is reported as a student investment asset on the student’s FAFSA.


Discuss this article on Facebook