FAFSA & Estate Planning: Maximize Financial Aid
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Planning for college expenses goes beyond saving money—it’s about understanding how financial aid and estate planning intersect. The way you structure your assets can significantly impact your child's financial aid eligibility. Here’s what you need to know to protect your wealth while maximizing support for your child’s education.
How FAFSA Assesses Assets
The Free Application for Federal Student Aid (FAFSA) determines financial aid eligibility based on family income and assets. But not all assets count the same way:
- Parent-owned assets are assessed at up to 5.64% when calculating the Expected Family Contribution (EFC).
- Student-owned assets face a much harsher assessment—up to 20% of their value.
For example:
- If a student has $10,000 in a custodial account (UGMA/UTMA), FAFSA assumes $2,000 will go toward college costs.
- By contrast, a parent’s $10,000 investment would only increase the EFC by about $564.
Keeping assets in a parent’s name whenever possible helps reduce the impact on financial aid.
Third-Party Ownership Considerations
- If a grandparent owns a 529 plan, FAFSA won’t count the asset itself.
- However, distributions from it will be considered
student income the following year—an amount that can be assessed at up to
50%.
Smart Asset Strategies for FAFSA and Estate Planning
Estate planning plays a critical role in positioning your family’s finances for both financial aid eligibility and long-term wealth preservation. Here are some ways to structure your assets wisely:
1. Rethink Asset Ownership
Avoid putting assets in a student’s name. If you’re saving for college, prioritize parent-owned 529 plans over custodial accounts. If you already have assets in a custodial account, they can’t be legally transferred, but future savings should be structured differently.
2. Leverage Retirement Accounts
FAFSA does not count retirement savings like 401(k)s, IRAs, or Roth IRAs when assessing financial aid. Maximizing contributions to these accounts is a strategic way to grow wealth without hurting financial aid eligibility.
3. Consider Trusts Carefully
Irrevocable trusts may remove assets from your estate for tax purposes, but FAFSA still counts them if the student or parent is a beneficiary. Additionally, any distributions to the student will count as income and be assessed at up to 50%. If considering a trust, it’s important to structure it properly with legal guidance.
4. Pay Down Debt
FAFSA does not consider home equity or personal debt, so using liquid assets to pay down mortgages or loans can be an effective way to reduce reportable assets.
5. Time Major Financial Moves
FAFSA takes a snapshot of your finances on the day you file. If you plan to sell investments or receive a large bonus, consider delaying these transactions until after filing to avoid inflating your assets for that year’s aid calculation.
Take Action Now
The right strategy can help protect your assets while securing financial aid for your child’s education. Here’s what you can do today:
✅ Review your asset ownership to see what’s impacting financial aid eligibility.
✅ Shift college savings to FAFSA-friendly accounts, such as a parent-owned 529 plan.
✅ Max out retirement contributions to reduce countable assets.
✅ Plan income events strategically to avoid affecting aid calculations.
How Can We Help?
Balancing estate planning with financial aid requires strategy and foresight. As your Personal Family Lawyer® Firm, we specialize in creating customized plans that protect your wealth while optimizing financial aid eligibility. Our approach ensures your assets are structured effectively and adapt to changes in laws, finances, and family dynamics.
Let’s build a plan that supports your child’s future while keeping your financial goals intact.
Book a 15-minute discovery call now!
