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Education Planning

It makes a big difference who owns the college nest egg—the parents or the student.

By Kirk Okumura

It is important for parents to save for their children’s post-secondary education. However, how they save is equally important if their education funding plans include the use of financial aid (loans, grants or work-study programs). For example, a $30,000 college nest egg could decrease a student’s financial aid eligibility by $1,692 or $10,500, depending on who owns it—the parents or the student. Understanding how financial aid is calculated can help parents optimize savings and the amount of financial aid a student receives.

Determining financial aid
In general, a student applies for financial aid by completing the federal government’s Free Application for Federal Student Aid. The data reported on the FAFSA is used to calculate the amount that the student and his parents are expected to contribute, which is called the expected family contribution or EFC, toward the cost of post-secondary education at any institution. The EFC is then subtracted from the cost of attendance, an amount based on the tuition, fees, room and board, and so forth that are associated with a specific educational institution. The difference is the student’s financial need for attending a particular institution. The greater the financial need, the more financial aid a student could qualify for. Note that in many cases, the amount of financial aid offered does not fully meet the student’s financial need.

Calculating the EFC
The main components for calculating the EFC are the income and assets of both the student and his parents, which are weighted differently. A student is expected to contribute 50 percent of his income and 35 percent of his assets. In contrast, a parent is expected to contribute an amount based on a bracketed scale, ranging from 22 percent to 47 percent of income and only 2.64 percent to 5.64 percent of assets. Both the student and the parents can subtract allowances, such as taxes and income-protection allowances, from their incomes. In addition, parents can subtract an age-based asset-protection allowance from their assets. For example, a dual-parent household could have $42,200 subtracted from its assets if the older parent is 45 years old.

Planning implications
The fact that student income and assets are weighted more heavily than parental income and assets has some planning implications.

First, in general, avoid accruing assets in the student’s name unless the tax benefits of using them outweigh the possible negative effect they may have on obtaining financial aid. Thus, parents should probably avoid custodial accounts such as a UGMA (Unified Gift to Minors Act) or UTMA (Uniform Transfer to Minors Act). Likewise, carefully weigh the use of a Coverdell education savings account (CESA) for post-secondary education expenses as it is also a custodial account.

Second, parents who have determined that existing UGMA or UTMA accounts are inconsistent with their planning goals should seek the advice of an accountant to find legal ways of effectively shifting the money to noncustodial accounts they own, provided the tax consequences are not prohibitive. A direct transfer of ownership of a UGMA or UTMA from a child to a parent is illegal. However, money from these custodial accounts may be used for legitimate expenses that benefit the student, as long as they are over and above normal child-related expenses such as food, clothing, daycare and so on. For example, if the student needs a car, it can be purchased using money from the student’s custodial account, and the parent can contribute a corresponding amount to a noncustodial account owned by the parent.

Third, grandparents who want to gift money to their grandchildren for their post-secondary education might consider purchasing a 529 plan (which is owned by the account holder and not necessarily the beneficiary) and retaining ownership of the account. Under current laws, an account the grandparent owns generally does not affect the EFC since neither the parent nor the child owns it.

These are just a few of the many planning implications that financial aid can have on saving for post-secondary education. For more information, visit the following websites: or Both sites have an EFC calculator you can use to learn more about how financial aid is calculated.

Kirk Okumura is an author and editor for The American College’s LUTC program. You can contact him at

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