Will Differences in Parent Assets Due to the Omission Sibling-Owned Custodial 529 Plan Accounts Cause Problems on the FAFSA?
By The Fastweb Team
August 31, 2017
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.”
But what about custodial 529 plan accounts that are owned by a sibling of the student? Are they reported as an asset of the parents on the student’s FAFSA, as they would on the sibling’s FAFSA? Or are they not reported on the student’s FAFSA because they are owned by neither the student nor the parent?
The most plausible interpretation is that custodial 529 plan accounts owned by the student’s siblings are not reported on the student’s FAFSA because neither the student nor his/her parents own the account. In the statutory language in section 480(f)(3) of the Higher Education Act of 1965, the phrase “the student” is referring to the applicant, not students generally.
However, there is still enough ambiguity that a college’s financial aid administrator may insist on a different interpretation where custodial 529 plan accounts owned by a sibling must be reported as a parent asset. They might note that sibling 529 plan accounts that are owned by a parent are reported as parent assets on the FAFSA, and argue that it doesn’t make sense for custodial 529 plan accounts owned by a sibling to be treated any differently. (It really doesn’t make sense, but the law doesn’t always make sense. For example, the current statutory language corrected an error in the previous statutory language, and may eventually be amended to resolve this ambiguity.) Until the US Department of Education issues clear guidance to clarify whether custodial 529 plan accounts owned by a student’s siblings are reported as parent assets on the student’s FAFSA, the interpretation is left to the discretion of the college’s financial aid administrator, and the decision of the financial aid administrator is final.
If 529 plan accounts owned by a student’s siblings are not reported as a parent assets on the student’s FAFSA, this can yield different figures for parent assets on the student’s FAFSA and a sibling’s FAFSA. If both the student and the sibling are enrolled at the same college, this discrepancy will be considered conflicting information. Conflicting information must be resolved before financial aid can be disbursed. Conflicting information can be resolved by explaining that the discrepancy is not really conflicting information, or by changing one or more of the data sources to eliminate the discrepancy.
When the college’s financial aid administrator asks about the discrepancy, the family can respond by noting that the discrepancy is due to the treatment of custodial 529 plan accounts. The financial aid administrator may either agree with the family or insist on changing the parent assets reported on both FAFSAs to include all sibling-owned 529 plan accounts.
Incidentally, the term “financial aid officer” may offend some financial aid administrators even though the Higher Education Act of 1965 uses the terms interchangeably, because that’s like calling them the financial aid police. The most common job titles are “financial aid administrator”, “financial aid counselor”, “financial aid adviser”, “director of financial aid” and “director of student finance”.
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