Financial Aid Impact
Your decisions on saving money for college impact the financial aid process. Come financial aid time, your family's income and assets are run through a formula at both the federal level and the college (institutional) level to determine how much money your family should be expected to contribute to college costs before you receive any financial aid. This number is referred to as the “expected family contribution” (EFC).
In the federal calculation, your child's assets are treated differently than your assets. Your child must contribute 20% of his or her assets each year, while you must contribute 5.6% of your assets.
For example, $10,000 in your child's bank account would equal an expected contribution of $2,000 from your child ($10,000 x .20), but the same $10,000 in your bank account would equal an expected $560 contribution from you ($10,000 x .056).
Under the federal rules, an UGMA/UTMA custodial account is classified as a student asset. By contrast, 529 plans and Coverdell ESAs are considered parental assets if the parent is the account owner. Accounts owned by grandparents or other relatives or friends don't count at all in the EFC equation. Also, distributions (withdrawals) from 529 plans and Coverdell ESAs that are used to pay the beneficiary's qualified education expenses are not classified as parent or student income on the federal government's aid form, which means that some or all of the money is not counted again when it's withdrawn. Other investments you may own in your name, such as mutual funds, stocks, U.S. savings bonds (e.g., Series EE and Series I), certificates of deposit and real estate are also classified as parental assets.
Regarding institutional aid, colleges are generally a bit stricter than the federal government in assessing a family's assets and their ability to pay college costs. Most use a standard financial aid application that considers assets the federal government does not, such as home equity. Typically, though, colleges treat 529 plans, Coverdell accounts and UGMA/UTMA custodial accounts the same as the federal government, with the caveat that distributions from 529 plans and Coverdell accounts are often counted again as available income.
Related Links
- 529 Plans
- Coverdell accounts
- Custodial accounts
- U.S. Savings Bonds
- Best ways to save for college
- Saving for retirement and college at the same time
- Financial aid impact