Parents spend a lot of time and effort planning for their own assets on the FAFSA. It’s worth taking at least as much time to think about your student’s assets, both since they count a lot more and since there are good ways to shelter them.
Unlike parents, students don’t get an Asset Protection Allowance, so 100% of their assets are considered available to pay for college. And those assets are assessed much more heavily: 20% instead of 5.64%. That’s a big difference: $1,000 in the parents’ checking account would increase EFC by $56 at most, whereas that same $1,000 in the student’s account would increase it by $200! Many students who worked over the summer have pretty hefty balances in their bank accounts in October– especially this year when the summer offered so few options for spending money. Fortunately, students have some good options to reduce the impact of their savings.
- Students who intend to use their money for college can contribute it to a parent-owned 529 account, which converts it from a student asset to a parent asset. There’s an added benefit here for some students: in states like Oregon that offer refundable tax credits for 529 contributions, the student can claim the tax credit for their contribution even if they don’t have an income tax liability. And then of course it prevents the money from being spent on something other than college.
- Students with earned income can contribute to Roth IRAs. This removes those dollars from the FAFSA calculation entirely.
- Students can also pay some of their fall expenses; parents can decide whether or not to reimburse them after filing the FAFSA.
The main other type of student asset is an UGMA or UTMA account. Students who have an UGMA/UTMA and are not yet in a FAFSA year (high school sophomores or younger) can liquidate the UGMA/UTMA and transfer the proceeds to a custodial 529 where they likewise are treated as a parent asset on the FAFSA. Because you’re required to sell the assets in the UGMA/UTMA before transferring to the 529, it’s best to deal with this in a year when income won’t be reported on the FAFSA or, if you’re in a FAFSA year, spread the sales and transfers over a few years if the proceeds of the sale will put you over the student Income Protection Allowance ($6,970 this year). And contact your 529 plan about the custodial 529. It’s slightly different than a “standard” 529 and it’s important to follow the rules to ensure a proper transfer.
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