A Child's Assets and FAFSA

     As parents prepare their children to be responsible adults after high school, many create savings account in their children’s name. Sometimes those accounts can accumulate large sums of money over time or are used as a vehicle for college savings. Having a child learn to save money at an early age and saving for college seems perfectly logical and indeed both concepts are. However, what most parents don’t understand is that significant savings in a child’s name is often actually a huge mistake when it comes to receiving financial aid.

    I should note that if you are absolutely certain your family will not qualify for financial aid there are some beneficial loopholes that can be exploited by putting money in a child’s name. Those can quickly be outweighed though if you do qualify for aid. The reason behind all this is due to the FAFSA. Remember, the FAFSA is the Free Application for Federal Student Aid and is essentially the clearinghouse for financial aid for all colleges and universities. In the FAFSA formula, a parent’s assets will be assessed up to 5.65%. A child’s, however, will be assessed at 20%.

So let’s say you are lucky enough to have squirreled away $25000 for your child’s college by the time they graduate from high school. If that money was in a parent’s name, you would be expected to contribute 5.65% or $1,412.50 towards the first year of college. However, if that same $25000 were in the child’s name, it would be expected that you contribute 20% or $5000 towards the first year. That difference could have been made up in grants, scholarships, or subsidized loans, if only the money were in the parent's name.

It should be said that when we are talking about assets here we might be talking about cash, bank accounts, CDs, savings bonds, stocks, mutual funds, trusts, even real estate. Any of these things, and some others, that are listed in the child’s name will need to be listed as an asset of the child on the FAFSA. It is also worth noting that money in a 529 plan or state-sponsored pre-paid college plan are treated as parent assets even if the child is listed as a beneficiary.

Therefore, both of those are probably better vehicles for saving for college than others, though both tie the money to college expenditures. Steep penalties can be imposed if funds are withdrawn for expenditures that are not approved by the established guidelines of those plans. Keeping savings in the parents’ name also keeps control over the money with the parent. If your child enters a dark period in their teenage years or after high school, you won’t have to worry about that money going to waste on purchases you would never approve of.

The financial aid process can be extraordinarily complicated and if you are serious about saving for college you should speak with a certified financial advisor who specializes in college savings. I am not a financial advisor but I do see a thin line between teaching your child about how to save and getting the most bang for your buck within your college savings. My personal opinion is that it is probably best not to put all your eggs in one basket and keep the money you do use in your child’s name to teach them how to save on the small side. It’s probably a good idea to make sure generous family members like grandparents understand this concept as well.