Each year, students and their parents must complete and submit the Free Application for Federal Student Aid (FAFSA) to qualify for financial aid. In addition to asking questions about income and family-owned businesses, the FAFSA also considers investments and college savings accounts when determining aid eligibility.The owner has control over the account and can change the beneficiary. The beneficiary is the student who will receive the funds from the account to pay for college costs. However, ownership can be tricky and could impact your financial aid negatively.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 stepparent'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. 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.
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