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Financial Aid Impact of Savings Vehicles

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The following table lists the current financial aid treatment of the most common savings vehicles. For the purpose of assessing the impact on financial aid eligibility, we assume that the beneficiary is the child and the account owner is the parent (except where specified otherwise). Generally speaking, if the account owner has the ability to change the beneficiary at any time, the savings are treated as an asset of the account owner, not the beneficiary.

Savings Vehicle Financial Aid Treatment Comments
Coverdell Education Savings Account (formerly Education IRA) asset of account owner (high impact if student owner; low impact if parent owner; high impact if owned by a third party) If the child is the account owner, it counts as a child asset. If a parent is the account owner, it counts as a parent asset. In most cases the child is the account owner. Distributions do not affect eligibility. Custodial Coverdell ESAs owned by a student, where the student is both the account owner and beneficiary, are reported as a parent asset if the child is a dependent student and a student asset if the student is an independent student. If the Coverdell ESA is owned by a grandparent or other third party, it is not reported as an asset on the FAFSA, but any distributions are reported as untaxed income to the beneficiary on the subsequent year's FAFSA.
Section 529 College Savings Plan asset of account owner (low impact if owned by student or parents; high impact if owned by a third party) Qualified distributions do not affect eligibility (i.e., qualified distributions do not count as income or a resource). Note that non-qualified distributions (i.e., distributions that are subject to federal income tax) do count as income to the distributee. Custodial 529 college savings plans owned by a student, where the student is both the account owner and beneficiary, are reported as a parent asset if the child is a dependent student and a student asset if the student is an independent student. 529 college savings plans owned by a third party, such as a grandparent, are not included as assets on the FAFSA, but distributions from such a plan are reported as untaxed income to the beneficiary on the FAFSA.
Section 529 Prepaid Tuition Plan asset of account owner (low impact if owned by student or parents; high impact if owned by a third party) Since the Higher Education Reconciliation Act of 2005, prepaid tuition plans have been treated as an asset on the FAFSA, with an asset value equal to the refund value. Custodial prepaid tuition plans owned by a student, where the student is both the account owner and beneficiary, are reported as a parent asset if the child is a dependent student and a student asset if the student is an independent student. 529 prepaid tuition plans owned by a third party, such as a grandparent, are not included as assets on the FAFSA, but distributions from such a plan are reported as untaxed income to the beneficiary on the FAFSA.
UGMA/UTMA Custodial Account asset of beneficiary (high impact)  
Series I and EE Savings Bonds asset of registered owner (low impact) A savings bond registered in the parent's name counts as a parent asset (low impact). A bond registered in the child's name as a single or co-owner counts as a child asset (high impact). If the bond was registered in the child's name, but parent's (owner's) funds were used to purchase the bond, the parent may change the beneficiary.
Regular Taxable Investments asset of account owner (low impact if owned by parent, high impact if owned by student)  
Variable Life Insurance not reported on FAFSA (low impact) Generally, the cash value of life insurance and assets in qualified retirement plans are not reported on the FAFSA.
Traditional IRA asset value not reported on FAFSA (low impact) Withdrawal will count as taxable income, affecting next year's financial aid. Current year taxpayer contributions to IRAs, SEP, SIMPLE, Keogh, 401(k), 403(b) and other retirement plans are reported as untaxed income on the FAFSA.
Roth IRA asset value not reported on FAFSA (low impact) If Roth IRA owner hasn't been invested for five years, withdrawal will count as taxable income, affecting next year's financial aid.
401(k) asset value not reported on FAFSA (low impact) Withdrawal counts as taxable income, affecting next year's financial aid. If you borrow from the 401(k) instead of withdrawing funds, amount received does not count as income.
2503(c) Minor's Trust asset of beneficiary (high impact) If trust restrictions prevent liquidation, trust will continue as an asset in subsequent years, continuing to hurt need-based financial aid eligibility.
Other Trust Funds asset of beneficiary (high impact) Generally speaking, voluntary restrictions on uses of the trust will backfire, hurting financial aid eligibility. Only court-ordered involuntary trusts, such as those established to pay future medical expenses, are omitted from the FAFSA. All other trusts will generally count as an asset of the beneficiary. If ownership of the trust is contested and the trust is frozen, it is not reported on the FAFSA. Please see the trust fund page for more information on the financial aid treatment of trusts.

 

 
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