Tips for tapping needs-based financial aid



Dear Joe, Any help for procrastinators? We are at the eleventh hour, with a daughter applying to college for next fall. Are there any moves you might suggest before we fill out CSS Profile and FAFSA forms to maximize her eligibility for financial aid? Currently, she has cash in a savings account from her own earnings and a custodial brokerage account. We have money in a mutual fund intended for education but never moved to a 529 account. I understand awards are based on amounts in the accounts the day you complete forms, but I am concerned that we have several upcoming expenses (orthodontia, major home and car repairs) that significantly reduce our available funds. Is there any advantage to opening a 529 plan now? What about 529 funds for younger siblings? Thanks for anything you can suggest. -- Mara


Dear Mara,

If you haven't already, first spend some time with online aid-eligibility calculators to get an idea of where your daughter stands regarding financial aid. You can find good ones at and You could also look at college Web sites. Many will post general information about student aid and some will have their own eligibility calculators.

If it looks like your daughter is in the running for need-based financial aid, then start thinking about moves you can make to maximize eligibility. Because investment assets in her name are counted heavily in the aid formulas, you might look for ways to "spend down" the custodial account by using it as the funding source for your daughter's share of auto insurance, vacation and other expenses.

However, you must take care when liquidating investments in the custodial account for two reasons. First, any gains reported on this year's tax return might reduce next year's aid eligibility. Dependent students have a $3,750 income protection allowance, along with allowances for federal, state and Social Security taxes. Income above the total allowances is assessed at a 50 percent rate in the calculation of her federal expected family contribution, or EFC.

The second reason for caution is the so-called "kiddie tax," which causes a child's investment income to be taxed using the parents' marginal tax rate. With some exceptions, the kiddie tax applies to students under the age of 24 who have unearned income of more than $1,900. If your daughter's capital gains and other investment income stay below that level, she is taxed entirely within her own brackets, which could be zero percent for a large portion of that income.

Naturally, it can be more difficult to get your daughter to part with her own hard-earned savings, especially for expenses she normally expects her parents to pay. However, you may be able to convince her to move that money into a 529 plan. Even when the 529 account shows her as the beneficiary and the owner, federal law says that it is counted as a parent asset in determining EFC. Parent assets are assessed at a rate of 5.64 percent or less compared with the 20 percent assessment rate on student assets. You can make the same move to a 529 with any unspent funds in the custodial account, and further reduce EFC, but be careful when triggering capital gains to avoid creating tax or financial aid problems.

Opening 529 accounts for younger siblings will not help federal aid eligibility, assuming you name yourself as owner of the account. The money is counted as a parent asset whether held in a 529 account or in a non-529 account. Conceivably, you could put the 529 accounts in the siblings' own names to remove them as parental assets, but you then also remove your ability to change account beneficiaries in the future or to retain control of those accounts when the children reach adult age -- generally 18 or 21.

If you pay down your mortgage and other debts and make other major cash expenditures prior to submitting the financial aid application, it will have only a modest impact on reducing EFC at the 5.64 percent maximum assessment rate on parent assets. It will reduce your assets, assessed at the 5.64 percent rate, but it doesn't reduce your income, the major determining factor in EFC. Because parent income is assessed at rates as high as 47 percent, you might do yourself more good by looking for ways to reduce your reportable income.

Popular Questions


Two kids, two 529 plans?

Dear Big Bill,
While it's possible to maintain a 529 plan in just one child's name, even when you intend to send more than one child to college, I generally recommend that families open a separate 529 account for each child.

That's assuming there is no additional cost to maintaining multiple accounts. If your 529 plan charges an annual or quarterly account maintenance fee, check to see if you can avoid the fee by signing up for automatic contributions through payroll deduction or electronic funds transfer)

With a separate 529 plan for each child, it becomes easier for you to tailor the mix of stocks, bonds and stable-principal investments (e.g., stable value, guaranteed principal and money market funds) to the particular ages of your children. When your older child is nearing high school graduation, you may want to ratchet down the level of market risk in her 529 plan. At the same time, you could keep a more-aggressive asset allocation in your younger child's 529 plan, accepting more risk for a potentially higher return. Many 529 plans offer "age-based" investment options that automatically make these adjustments as the beneficiary ages.

Separate accounts for your children also offer more gift-tax leeway. Since your 529 contributions are treated as gifts from you to the account beneficiary, your $15,000 (in 2018) annual gift exclusion will go twice as far with two accounts -- one for each child -- than with just one account.

Financial aid is another reason to recommend maintaining separate accounts. You wouldn't want the investments reserved for your younger child's future college expenses to count against your older child's financial aid eligibility. Be warned: The rules here are rather murky, and the impact of a sibling's 529 account may depend on the college's own policies as well on as the type of aid -- federal or institutional -- being sought.

Finally, I believe that separate 529 accounts allow for better family bookkeeping. There will never be any doubt as to your intention to help send all of your children to college. You'll avoid the uncomfortable position of being asked to explain to a curious 8th-grader why account statements are showing up in the mail with only a brother or sister's name on them. And in the event of your death or divorce, no matter how unlikely, your legal representatives and other family members will have less reason to question your actions in setting up and funding the 529 plans.

Even with separate accounts, you'll continue to have the flexibility to shift the money around in the future. You simply need to make sure that whenever funds are withdrawn from the 529 plan to pay for college they are coming from an account in the name of the child incurring the costs. It's a simple matter to change the beneficiary designation among family members at any time, transfer 529 funds between different family members' accounts or split one 529 account into two. The ability to move assets around the family is a key advantage of 529 plans when comparing other college-savings alternatives, such as Uniform Transfers to Minors Act, or UTMA, accounts.

Original Post: 2005-10-13
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Coverdell ESA vs. 529 Plan: Which to choose? (Script)

The Coverdell ESA and the 529 plan are both excellent college savings vehicles because they are both tax-free when used for college. But many families face a choice: do they use a 529 plan for all of their child's college savings, or do they use a Coverdell for the maximum amount of $2,000 each year and put any any extra savings above $2,000 into a 529 plan? In spite of its low annual contribution cap, Coverdell's are now attracting quite a few families. There are two major reasons for that. One is that only the Coverdell allows you to self-direct your investments, just like you might self-direct the investments in your IRA. The other is that in addition to college expenses, Coverdells can be withdrawn tax-free to pay for a broad range of K-12 expenses, while 529 plans are limited to K-12 tuition. This feature is appreciated most in families planning to send their children to private grade schools, which may include additional costs such as room and board or uniforms. A 529 plan, on the other hand, does not impose age limits or income limits like the Coverdell does and so overall we see a lot more money going into 529 plans than into Coverdells. Plus many savers are happy with the investment choices offered by the 529 plans and don't necessarily want to self-direct their investments. And don’t forget this: your state may be giving you a state tax deduction for using a 529 plan, but there are no states offering a state tax deduction for investing with a Coverdell ESA.

Learn more about Coverdell ESAs.

Original post date 2013-07-15
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Top 529 Plan Withdrawal Tips. (Script)

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Top 529 Plan Withdrawal Tips. (Video)

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