The Free Application for Federal Student Aid (FAFSA) uses the assets and income of both the parents and the student to calculate the expected family contribution (EFC). The EFC is a measure that determines how much federal aid a student may receive.
Some assets are protected and do not need to be listed on the FAFSA, including 401(k)s, pension plans, 403(b)s, IRAs, and other retirement plans. Equity in a family's primary residence, certain family-owned businesses and farms, life insurance, annuities, and personal possessions are also nonreportable.
The questions the FAFSA asks about parental assets pertain to ownership interest at the time the application is completed. Reportable parental assets include cash and funds held in bank accounts, trust funds, 529 accounts, and more. Parental assets are considered low-impact assets for financial aid purposes: up to 5.64 percent of the value of parental assets will affect the EFC.
Student assets include property for which the student has an ownership interest at the time the FAFSA is completed. UTMA/UGMA accounts, for example, fall into this category. Custodial 529 accounts and 529 accounts owned by the student are not considered assets of the student and should be listed as parental assets. Student assets are considered high-impact assets for financial aid purposes: up to 20 percent of the value of student assets will affect the EFC.
Because assets owned outside of the immediate family are not included on the FAFSA, often, grandparents will own 529 plans for the benefit of the student. While this may make sense in certain cases, there are some details to consider before moving forward with this strategy. Funds in a grandparent-owned 529 plan are not considered countable assets on the FAFSA, but money that's taken out of the 529 plan and used to pay for education expenses is considered nontaxable income to the student. These distributions from a grandparent-owned 529 plan will reduce eligibility for need-based aid by as much as 50 percent of the amount of the distribution. So, if grandparents do own a 529 plan for the benefit of the child, you may want to consider reserving those funds for the last two years of college, as there is a two-year lag when completing income questions on the FAFSA. For example, a family completing the 2019 - 2020 FAFSA would use information from its 2017 (often referred to as the prior-prior year) tax returns.