Skip to main content

Commentary & Insights

Insight, Financial Planning

The College Payment Puzzle

01 September 2021
Nick Fedrow

By: Nick Fedrow

At some point in time, almost every parent has likely heard the phrase “It takes a village to raise a child.” While this may certainly be true of nurturing our youth, skyrocketing costs of tuition and other expenses often mean it takes a village to fund a college education as well. Despite structured savings plans, gifts from relatives, and even grants or scholarships, the need for additional financing through student loans is a reality facing many families today. To complicate matters further, the way your family saves and spends money for college can have a large impact on financial aid.

Finagling FAFSA

I could write a textbook on the formulas used to calculate eligibility through the Free Application for Federal Student Aid (FAFSA). However, the specific percentages and nuanced calculations are not as important as the fact that student income and assets are more heavily weighted than those of their parents. While all income sources and assets, both students’ and parents’, will reduce overall financial aid availability, the more income and assets attributed specifically to the student, the greater proportionate decrease in student aid eligibility.

Not All Savings are Created Equal

Although the delineation between income and assets of parents versus that of students may sound obvious, it can be more complicated than you might think. Sure, some items are straightforward: wages earned by a parent are considered parent income, and wages earned by the student are considered student income. Even many investment accounts set up to save for college are quite clear how they would be considered on the FAFSA. For example, a brokerage account owned by parents used to cover college costs for their children would be considered parent assets and weighted less heavily. Likewise, a custodial brokerage account set up for the student, where the holdings become the student’s at age of majority, would be considered student assets and weighted more heavily. But what about money from accounts owned by grandparents or other relatives for that matter? What about college savings plans where the student is the beneficiary but not the owner? These types of assets can often play a significant role in funding a college education, but their treatment for student aid eligibility is not so cut and dry.

FAFSA treatment gets tricky for accounts owned by non-parent relatives on which the student is a beneficiary. That is because these accounts are not considered assets at all on the FAFSA — in fact, on the initial application they are not even considered toward eligibility in any way. Sounds great, right? Actually, if timed incorrectly, it can be quite the opposite. That is because once received, these distributions are considered student income. While I indicated that percentages and calculations are not as important to know, I will share one: a student’s income reduces their aid eligibility by 50% – the single largest percentage impact when calculating federal aid. Therefore, if used at the wrong time, assets from such accounts could dramatically and negatively affect future aid. This consideration goes for college savings plans owned by non-parent relatives with the student as beneficiary as well.

With regards to income, the FAFSA has a two-year look back period, meaning both the student’s and parents’ income from the prior two years is considered when determining eligibility. For example, if applying for student aid in the 2021-2022 school year, 2019 and 2020 income will be reported on the FAFSA. So, while non-parent relative-owned accounts can have a major role in covering college expenses, to avoid reducing financial aid, it is best to wait to use them until the student’s last two years of college, if possible.

Thankfully, parent-owned college savings plans on which the student is the beneficiary are considered parent assets and have one of the smallest percentage impacts toward aid eligibility. Additionally, anyone can contribute to these plans regardless of who owns it. Furthermore, they offer a simple, diversified way to save for post-secondary education, and any growth is tax-free so long as it is used for qualified education expenses. For more information on 529 Savings Plans, click here.


While the FAFSA process may not be very straightforward, keeping the above considerations in mind when saving and spending for college can be helpful. If you think you will need financial aid to fund your child’s education, speak with your financial advisor about the best way to integrate savings alongside it. The days when working part-time was enough to cover the cost of university are long gone — today, it takes a village.

For additional insight into utilizing 529 plans to reduce estate taxes, please also see our article “Take the 529”.