When applying for financial aid for college, the Free Application for Federal Student Aid, or FAFSA, looks at a range of factors to determine how much each family is expected to pay. Different factors are weighted differently. For example, a much larger percentage of a student’s earnings are counted toward the expected family contribution than parental assets. The higher the expected family contribution, the lower the need-based financial aid. Knowing how different assets are treated can help you make the best decisions about how to save for college.
TL;DR (Too Long; Didn't Read)
When determining the expected family contribution, the FAFSA does consider the cash in a student's bank account.
Student and Custodial Accounts
A student’s bank account is included as a student asset when it comes to figuring financial aid. Student assets also include custodial accounts, such as a Uniform Gift to Minors Act account or Uniform Transfers to Minors Act account. Under the FAFSA formula, about 20 percent of student assets are used to calculate the expected family contribution.
Student and Family 529 Plans
A 529 plan in the student’s name is treated different than other student assets because it is counted as a parental asset. Unlike student assets, only about 5.64 percent of parental assets are counted toward the expected family contribution for college. For example, $10,000 in a 529 plan owned by the student or parent would only increase the student’s expected family contribution by about $564. If that same $10,000 were in a bank account in the student’s name, the money would increase the expected family contribution by about $2,000.
However, 529 plans owned by other relatives, such as grandparents, are treated differently. These assets aren’t included as an asset of either the parent or the student. However, any distributions from the plans used for the student is counted as income for the student, and the rate for student income is even higher than for student assets.
Student Employment Income
Student income each year is also used to calculate the expected family contribution. Income in excess of the allowances is counted at 50 percent toward the expected family contribution. As of the 2018-2019 school year, the standard allowance is $6,660, plus there are additional allowances for certain taxes. If you’re already above the allowance, 50 percent of any interest a student earns on the bank account is counted toward the expected family contribution.
School Formulas May Differ
Each school is free to set its own formula for financial aid from the school’s own funds, so your school could use a different formula for institution-based financial aid. For example, your school could count 529 plans at a higher rate than the federal formula, but student income at a lower rate.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."