Will Differences in Parent Assets Due to the Omission Sibling-Owned Custodial 529 Plan Accounts Cause Problems on the FAFSA?

Mark Kantrowitz

December 19, 2011

Since siblings’ UTMA 529s don’t get reported on the FAFSA, but the student’s UTMA 529 is counted as a parent asset, each of my kids would have a different amount listed on the FAFSA as parent assets. The amounts would be vastly different because most of my son’s money will have been used by the time my youngest starts college. We’ll have three children in college at the same time, and two of them are going to the same school. I’m concerned, even though I think having different amounts is correct, that this might make the financial aid officers suspicious. — Donna R.

The statutory language in the Higher Education Act of 1965 is somewhat ambiguous concerning the treatment of custodial 529 plan accounts owned by a sibling of a dependent student.

The College Cost Reduction and Access Act of 2007 (P.L. 110-84) changed the treatment of qualified education benefits effective July 1, 2009. This legislation amended section 480(f)(3) of the Higher Education Act of 1965 to treat qualified education benefits that are owned by a dependent student as though they are assets of the parent, not the student. The statutory language now reads: “A qualified education benefit shall be considered an asset of (A) the student if the student is an independent student; or (B) the parent if the student is a dependent student, regardless of whether the owner of the account is the student or the parent.” Qualified education benefits include 529 college savings plans, prepaid tuition plans and Coverdell Education Savings Accounts.

Clearly, if the applicant is a dependent student, any custodial 529 plan accounts owned by the applicant are reported as parent assets, as are any regular 529 plan accounts owned by the parents. In particular, the parent assets include not just the parent-owned 529 plan accounts that name the applicant as a beneficiary, but also parent-owned 529 plan accounts that name anybody else as a beneficiary, such as the applicant’s siblings.

This interpretation is reflected in the printed FAFSA instructions, which state “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.” The online FAFSA instructions provide similar advice: “Note: Students who must report parental information on this form should report all qualified educational benefits or education savings accounts owned by the parents and/or the dependent student as part of the parental assets.”

The 2011-12 Application and Verification Guide provides a similar interpretation: “Qualified tuition programs (QTPs, also known as section 529 plans because they are covered in section 529 of the IRS tax code) and Coverdell education savings accounts are grouped together in the law as qualified education benefits and have the same treatment: they are an asset of the owner (not the beneficiary because the owner can change the beneficiary at any time), except when the owner is a dependent student, in which case they are an asset of the parent. When the owner is some other person (including a non-custodial parent), distributions from these plans to the student count as untaxed income, as money received.”

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