How to Minimize the Impact of a Student's Brokerage Account on Financial Aid
November 26, 2012
We have an UTMA mutual fund for our son who is a senior in high school (17 years old). It is approximately $19,000 and was intended to help pay for college costs. When we opened it we weren’t aware of the impact it could have on financial aid. I realize it’s too late to fix anything for his freshman year next year, but will it help him any for his sophomore year if we take it out prior to the end of this tax year? His other school money is in an educational IRA and won’t ding him as much. — D.G.
Custodial bank and brokerage accounts, such as UTMA and UGMA accounts, are treated as a student asset on the Free Application for Federal Student Aid (FAFSA). This has a more severe impact on eligibility for need-based financial aid than parent assets. Student assets reduce aid eligibility by 20 percent of the asset value. Some parent assets are sheltered from the need analysis formula. The remaining parent assets will reduce aid eligibility according to a bracketed scale, with a top bracket of 5.64 percent.
Parents can fix such a situation by moving the student’s money into the custodial version of a 529 college savings plan. Even though a custodial 529 plan is technically the student’s asset, federal law since 2009 has treated custodial 529 plan accounts as though they were a parent asset on the FAFSA. (Prepaid tuition plans and Coverdell education savings accounts are also treated as parent assets, but are more likely to be affected by contribution limits.)
Parents can also spend the student’s money for the student’s benefit, so long as the expenses are not normally considered parental obligations, such as food, shelter and medical care. For example, if the student will need a car or computer for college, the parent could buy it with the student’s money. Parents can also spend the student’s money for college costs, such as tuition and fees, room and board, and books and supplies.
Since assets are reported on the FAFSA as of the application date, parents can address the harsher treatment of student assets at any time prior to filing the FAFSA, not just before the prior tax year.
(Practically speaking, any changes in assets should occur at least a month before filing the FAFSA. During verification, college financial aid administrators may ask for copies of bank and brokerage account statements, especially if the interest and dividend income on the student’s income tax return is high compared with the student assets reported on the FAFSA. Accordingly, any changes in the student’s assets should occur early enough to be reflected in the most recent statements prior to filing the FAFSA.)