I have two questions which I assume you've been asked a million
times and I just want to make sure I'm understanding the write-ups
about them correctly. We have a regular UGMA/UTMA savings account for
our daughter where we are the custodian. In the FAFSA application,
should this be entered under the student or the parent? Am I assuming
correctly that a regular 529 plan will be entered under the parent
asset in the FAFSA application? Last year I reported both the 529
plan and the UGMA/UTMA under the student's net worth on the FAFSA.
Our family income was about $75,000 and yet our EFC was about
$15,000. The only assets we have other than retirement plan accounts
are the UGMA/UTMA account and the 529 plan. This year we will be filling
out our third year of FAFSA. Now I'm wondering if we've been filling
out our FAFSA app correctly.
A $15,000 EFC on $75,000 in family income and minimal assets is too
high. The federal need analysis formula is harsh, but not that
harsh. The most common causes of an unusually high EFC as compared
with parent income (i.e., an EFC that is 20% or more of parent income
for parent income under $100,000) are high student income or high student
Regular UGMA/UTMA accounts, such as custodial bank and
brokerage accounts, are reported as student assets on the Free
Application for Federal Student Aid (FAFSA). 529 college savings plan
accounts, on the other hand, are reported as a parent asset if the
student is a dependent student, regardless of whether the 529 plan
account is owned by the student or the parent.
The following is the relevant excerpt from the FAFSA instructions:
Investments also include qualified educational benefits or education
savings accounts (e.g., Coverdell savings accounts, 529 college
savings plans and the refund value of 529 prepaid tuition plans). For
a student who does not report parental information, the accounts owned
by the student (and/or the student's spouse) are reported as student
investments in question 41. 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.
Unfortunately, reporting a 529 plan as a student asset on the FAFSA is
a common error. Parents sometimes assume that the 529 plan should be
reported as a student asset because the student is the
beneficiary. Always read the instructions carefully. Congress changed
the Higher Education Act of 1965 effective starting with the 2009-10
award year to treat the 529 plans as though they were a parent asset.
Parent assets are treated more favorably than student assets on the
FAFSA. The FAFSA ignores qualified retirement plans (e.g., traditional
and Roth IRAs, 401(k) and 403(b) accounts and pensions), the net worth
of the family home and any small businesses owned and controlled by
the family. An asset protection allowance shelters a portion of parent
assets, typically $45,000 to $50,000. Any remaining parent assets are
assessed on a bracketed scale that runs from 2.64% to 5.64%. This is
in contrast with student assets, which reduce aid eligibility by 20%
with no asset protection allowance.
Errors on the FAFSA may be corrected at any time. Incorrectly
reporting a 529 plan as a student asset is considered to be an
error. It is best to notify the college financial aid office before
making a correction to the FAFSA, since otherwise the college
financial aid administrator may disallow the change. Since the award
year has not yet ended, the error should be corrected on both this year's
and last year's FAFSAs. Depending on the college's financial aid
policies and contingency funds, the college might be able to increase
this year's financial aid package to reflect the increase in aid
eligibility after the error is corrected.
Reporting the UGMA/UTMA account as a student asset, on the other hand,
is correct. Information that is correct as of the date the FAFSA was
filed cannot be updated to reflect subsequent changes.
If the family has not yet filed the FAFSA, they could liquidate the
UGMA/UTMA account and invest the proceeds in a custodial 529 plan
account before filing the FAFSA. (With a traditional 529 plan account,
the parent is the account owner and the student is the
beneficiary. With a custodial 529 plan account, the student is both
the account owner and the beneficiary.) The money would then be
treated as though it were a parent asset. The family could also spend
the student's money on college costs before filing the FAFSA (i.e.,
instead of using the money in the existing parent-owned 529 plan or
other parent assets). But once the FAFSA is filed, the FAFSA cannot be
updated to reflect a change in the nature of the student's assets.
It may still be worthwhile to address the student's assets for the
benefit of next year's FAFSA. Otherwise those assets will hurt the
student's eligibility for need-based financial aid for an additional year.