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WALSH & ASSOCIATES BLOG

Thursday, 21 March 2019 16:11

Will a 529 or UTMA Affect My College Student’s Eligibility for Financial Aid?

A client approached us recently with this question: We’re saving money for our daughter’s college education, but she’ll still need a scholarship. What effect will a 529 Savings Plan versus an UTMA have on her eligibility for financial aid?

That’s a great question, and one not many parents think to ask. Here’s a breakdown of how these accounts are factored into the financial aid equation.

The FAFSA

The Free Application for Federal Student Aid (FAFSA) is the form completed by prospective college students to determine their eligibility for financial aid from the federal government, states, colleges and other organizations. FAFSA filing season opens October 1, and students and parents have until June 30 to file.

The information reported on the student’s FAFSA is used to calculate a student’s Expected Family Contribution (EFC), an important figure for students applying for need-based financial aid.1 The Cost of Attendance (COA) minus EFC equals the student’s Financial Need. An entity that utilizes the FAFSA to award need-based aid will not award higher than the student’s calculated Financial Need. For example, if the COA is $20,000 and the EFC $17,000, a student will not be eligible to receive more than $3,000 in need-based aid.

Reporting UTMAs and 529s on a FAFSA

As a refresher, an UTMA (Uniform Transfer to Minors Act) account is established on behalf of a minor, is not limited to education spending, and will be in the child’s full control once he or she reaches the age of majority (typically 18-21). An UTMA account is reported as a student asset on the FAFSA.

A 529 Savings Plan established by a parent with a child as the beneficiary is solely for qualified education expenses (or will incur a hefty 10% penalty plus additional taxes), and the owner of the account always maintains control of the account. If the parent opened the 529 account, it is reported as a parent asset on the FAFSA.2

Here’s the important difference between the two with regards to financial aid: the FAFSA assesses student assets at 20% but parent assets on a bracketed system at a maximum rate of 5.64%.3 In other words, the EFC calculation assumes that 20% of the student’s assets will be used to pay for schooling while only 5.64% of a parents’ assets will.

To give an example, if your student has an UTMA account with $20,000 in it, it will be assessed as though 20% will go towards paying for attendance. This will lower your student’s calculated Financial Need by $4,000. However, if you opened a 529 account for your student, the account has a balance of $20,000, and it is assessed at the maximum rate of 5.64%, it will only reduce your student’s Financial Need by $1,128.

Considering an UTMA-529 conversion?

If you are now considering converting that UTMA account into a 529, it’s time to talk to your financial advisor about the pros and cons. For example, while a 529 will fare better on the FAFSA for your student’s financial aid eligibility, there may be capital gains when liquidating the UTMA (as 529 contributions must be made in cash). Or, your student may be in need of some large purchases in preparation for college, and you could spend down the UTMA account on those items before filing the FAFSA.

No single strategy is right for every family, so speak with your financial advisor before filing your FAFSA. At Walsh & Associates, we offer comprehensive financial planning services, and planning for education expenses is one of our specialties.

 


1Eligibility for non-need-based aid—like athletic scholarships or merit-based scholarships—is not determined using the Expected Family Contribution; instead, it is calculated as the Cost of Attendance minus any financial aid awarded to the student thus far.

2This example applies solely to parent-owned 529 Savings Plans and not student-owned or grandparent-owned plans.

3FinAid.org – Account Ownership: In Whose Name to Save?

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

LPL Financial and Walsh & Associates do not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.

Investors should consider the investment objectives, risks, charges and expenses associated with the municipal fund securities carefully before investing. The issuer's official statement contains this and other information about the investment. You can obtain an official statement from your financial representative. Read carefully before investing.

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