Key Takeaways
- Parent assets are assessed at up to 12% of net worth above the asset protection allowance in the FAFSA formula
- Student assets are assessed at 20%, making UGMA/UTMA accounts significantly more harmful to aid eligibility
- The Student Aid Index (SAI) replaced EFC starting with 2024-2025 FAFSA and can now be negative
- 529 plans owned by grandparents no longer count as student income under FAFSA Simplification (2024+)
- The student income protection allowance is $11,510 for 2025-2026 ($11,770 for 2026-2027)
Education Funding Strategies
Effective education funding requires more than just saving money - it requires strategic positioning of assets, understanding the financial aid formula, and coordinating multiple funding sources.
Understanding the FAFSA Formula
Student Aid Index (SAI) Overview
The Student Aid Index (SAI) replaced the Expected Family Contribution (EFC) starting with the 2024-2025 FAFSA. Key changes include:
| Feature | Old EFC | New SAI |
|---|---|---|
| Can be negative | No (minimum 0) | Yes (negative indicates highest need) |
| Number of students in college | Reduced EFC | No longer considered |
| Small business exemption | Generally excluded | Must report if 100+ employees |
| Grandparent 529s | Distributions counted as income | Not counted as income |
| Child support received | Not counted | Counted as untaxed income |
The Basic Financial Aid Formula
Financial Need = Cost of Attendance (COA) - Student Aid Index (SAI)
Example: Cost of Attendance $75,000 - SAI $20,000 = Financial Need $55,000 (maximum need-based aid available)
Asset Assessment Rates
How Assets Affect SAI
| Asset Owner | Assessment Rate | $100,000 Asset Effect on SAI |
|---|---|---|
| Parent | Up to 12% | Up to $12,000 |
| Student | 20% | $20,000 |
| Grandparent 529 (pre-2024) | Distribution counted as income | Potentially $22,000+ |
| Grandparent 529 (2024+) | Not counted | $0 |
Parent Asset Calculation
Parent assets are assessed using a bracketed formula after the Asset Protection Allowance is subtracted:
Parent Contribution from Assets = (Net Worth - Asset Protection Allowance) x 12%
Student Asset Assessment
Student assets are assessed at a flat 20% rate with no protection allowance:
Student Contribution from Assets = Student Net Worth x 20%
Example: Student has $10,000 in UGMA account. SAI increases by $10,000 x 20% = $2,000.
Assets Included vs. Excluded
Assets Reported on FAFSA
| Asset Type | Parent | Student |
|---|---|---|
| Cash, checking, savings | Yes | Yes |
| 529 plans (parent-owned) | Yes | N/A |
| UGMA/UTMA | N/A | Yes (20%) |
| Brokerage accounts | Yes | Yes |
| Rental property (net equity) | Yes | Yes |
| Trusts | Yes | Yes |
Assets NOT Reported on FAFSA
| Asset Type | Why Excluded |
|---|---|
| Primary residence equity | Exempt from FAFSA |
| Retirement accounts (401k, IRA, Roth) | Qualified retirement plans exempt |
| Cash value life insurance | Not reported |
| Annuities | Not reported |
| Family business (<100 employees) | Small business exemption |
| Family farm (if lived on and operated) | Farm exemption |
Strategic Asset Positioning
Strategies to Reduce SAI
Move Student Assets to Parent:
- Transfer UGMA/UTMA to 529 plan (counts as parent asset)
- Caution: UGMA/UTMA belongs to child; transfer may have gift/legal implications
- Consider spending down student assets on qualified expenses before FAFSA
Maximize Excluded Assets:
- Pay down primary residence mortgage
- Make retirement plan contributions
- Fund cash value life insurance
- Prepay expenses
Income Strategies
Student Income Protection: Students receive an Income Protection Allowance of $11,510 (2025-2026) or $11,770 (2026-2027). Income above this amount is assessed at approximately 50%.
Parent Income Considerations: Report prior-prior year income (2025-2026 FAFSA uses 2023 taxes). Capital gains, retirement distributions, and bonuses in base years increase SAI.
Coordination of Multiple Funding Sources
Funding Source Priority
| Priority | Source | Notes |
|---|---|---|
| 1 | Free money (grants/scholarships) | Always maximize first |
| 2 | 529 plan distributions | Tax-free for qualified expenses |
| 3 | Tax credits (AOTC/LLC) | Coordinate with 529 to avoid double benefit |
| 4 | Student work income | Builds responsibility; watch income limits |
| 5 | Federal student loans | Subsidized before unsubsidized |
| 6 | Parent PLUS loans | Higher rates; consider alternatives |
| 7 | Private loans | Last resort; compare rates carefully |
Coordinating 529s and Tax Credits
You cannot use the same expenses for both 529 tax-free distribution AND education tax credits.
Strategy: Use 529 for room, board, books. Use out-of-pocket for first $4,000 tuition (AOTC eligible).
Example: Total expenses $30,000. First $4,000 tuition: Pay out-of-pocket, claim AOTC ($2,500 credit). Remaining $26,000: Use 529 tax-free.
CFP Exam Tip: Know the criteria for independent status - dependent students use parent financial information, which usually results in higher SAI.
Under current FAFSA rules, at what rate are student assets (such as UGMA accounts) assessed for financial aid purposes?
Starting with the 2024-2025 FAFSA, how are distributions from grandparent-owned 529 plans treated?
Which of the following assets is NOT reported on the FAFSA?