Chapter Five · Financial Aid
How kids savings accounts affect FAFSA
Updated 27 April 2026
The account type you choose can affect college aid by thousands of dollars. The FAFSA formula treats different account types very differently. Student-owned assets are assessed at 20% per year. Parent-owned assets at just 5.64%. Understanding the distinction before you start saving prevents costly mistakes.
By account type
Assessment rates and protection allowances
| Account type | Classification | Rate | Protection |
|---|---|---|---|
| Custodial (UTMA / UGMA) | Student asset | 20% | None |
| Joint savings | Parent asset | 5.64% | Yes (age-based) |
| 529 (parent-owned) | Parent asset | 5.64% | Yes (age-based) |
| 529 (grandparent-owned) | Not reported | 0% | since 2024-25 |
| Custodial Roth IRA | Not reported | 0% | retirement |
| Coverdell ESA | Parent asset | 5.64% | Yes (age-based) |
In dollars
Annual aid reduction by balance and account type
| Balance | Custodial 20% | Joint / 529 5.64% | Roth IRA 0% | 4-yr custodial cost |
|---|---|---|---|---|
| $5,000 | -$1,000 | -$282 | $0 | -$4,000 |
| $10,000 | -$2,000 | -$564 | $0 | -$8,000 |
| $25,000 | -$5,000 | -$1,410 | $0 | -$20,000 |
| $50,000 | -$10,000 | -$2,820 | $0 | -$40,000 |
| $100,000 | -$20,000 | -$5,640 | $0 | -$80,000 |
A worked example
The $11,500 mistake
Consider a family that saved $20,000 for college. Here is how the structure choice plays out across four years of FAFSA filings:
Custodial
$20,000 × 20% = $4,000/yr
4 years: $16,000 in lost aid
Joint or 529
$20,000 × 5.64% = $1,128/yr
4 years: $4,512 in lost aid
Net difference: $11,488 in financial aid eligibility based solely on account type.
Recent changes
2024-2025 FAFSA simplification
Grandparent 529 loophole closed (in a good way)
Distributions from grandparent-owned 529 plans are no longer reported as student income. Previously these distributions could increase student income on FAFSA by up to 50%. The change makes grandparent 529 contributions much more attractive.
Sibling 529 treatment
Parent-owned 529 plans are reported as a parent asset regardless of which child is the beneficiary. The total of all parent-owned 529s is assessed at 5.64%.
Student Aid Index replaces EFC
The Expected Family Contribution (EFC) has been replaced by the Student Aid Index (SAI). The SAI can be negative, down to -$1,500, potentially increasing aid for lower-income families.
Strategy
Which account type maximises aid
Best
Custodial Roth IRA (0% FAFSA)
If your child has earned income, a custodial Roth IRA is invisible to FAFSA. Growth is tax-free. Downside: requires earned income and annual contribution limits apply.
Great
Grandparent 529 (0% since 2024-25)
Thanks to FAFSA simplification, grandparent-owned 529s no longer penalize the student. Tax-free growth and education withdrawals. No FAFSA impact.
Good
Parent 529 or joint savings (5.64%)
Parent assets are assessed at the lower 5.64% rate. A $20,000 balance reduces aid by $1,128/yr. If you exceed the asset protection allowance, this rate applies.
Avoid for aid
Custodial UTMA / UGMA (20%)
Student assets have no protection allowance and are assessed at 20%. A $20,000 balance reduces aid by $4,000/yr. Avoid if FAFSA optimisation is a priority.
Postbag
Aid questions parents ask most
Does FAFSA count money in a regular savings account?
It depends on whose name the account is in. A parent-owned savings account (including a joint account with the child) is a parent asset assessed at 5.64% above the asset protection allowance. A custodial account in the child's name is a student asset assessed at 20% with no protection allowance.
What is the asset protection allowance?
FAFSA shields a portion of parent assets from the formula based on the age of the older parent and family size. For 2024-2025 the allowance was reduced to near zero for many families under the FAFSA Simplification Act. Check the current year's Student Aid Index formula for exact figures.
Should I spend down my child's custodial account before filing FAFSA?
Spending custodial funds on legitimate child expenses (computer for school, car for commuting, summer programs) before filing FAFSA reduces the reported balance. The funds must be used for the child's benefit. You cannot simply transfer custodial money into a parent account.
Do grandparent-owned 529 plans affect FAFSA?
No, not since the 2024-2025 FAFSA cycle. Under the FAFSA Simplification Act, distributions from grandparent-owned 529 plans are no longer reported as student income. This was a major change that removed the biggest drawback of grandparent 529 contributions.
Does a custodial Roth IRA count on FAFSA?
Retirement accounts, including custodial Roth IRAs, are not reported as assets on FAFSA. This makes a custodial Roth IRA one of the most FAFSA-friendly savings vehicles, but it requires the child to have earned income and contributions are limited to the lesser of earned income or the annual IRA limit.