College Planning

College Planning

The cost of receiving a college education continues to rise. For the 2015-2016 school year, the average cost for tuition and fees (does not include room & board) for one year at a private college was $32,405, in-state residents at a public college was $9,410, and out-of-state residents at a public college was $23,890. It is estimated that a child born in 2015 will have to pay nearly $550,000 for a private four-year college education and $240,000 for a public four-year college education. This expense will present a challenge for many families, which is why saving for college is imperative. It is important to understand the best ways to save for college and how your assets factor into the Expected Family Contribution (EFC) calculation used by the financial aid office to determine aid eligibility.

529 College Savings Plans & UGMA/UTMA Accounts

529 College Savings Plans and UGMA/UTMA accounts provide tax efficient ways to save for college. A 529 College Savings Plan is a tax-advantaged savings plan designed to encourage saving for future college expenses. This account can be opened by anyone on behalf of a student. The money in this plan is then invested to be used in the future for college expenses. The money grows tax-deferred and the earnings can be used tax free for qualified education expenses. 529 College Savings Plans are owned by the person establishing the account. Depending on who owns the 529 plan, the consideration of this asset against financial aid will vary.

529 plans owned by parent or student
– Asset is counted on the FAFSA application as a parental asset
– Maximum of 5.64% counted towards EFC calculation

529 plans owned by grandparents or anyone else
– Assets are not counted on the FAFSA application

A UGMA/UTMA account is a custodial account that allows you to transfer assets to a minor. These accounts allow a minor to own securities in an account without the need for an attorney to draw up a special trust. These accounts are not designed specifically to provide financing for college expenses. However, since the assets in this account become available to the minor when he or she reaches the age of majority, many people do use these accounts for college expenses.

UGMA/UTMA accounts
– Asset is counted on the FAFSA application as an asset of the student
– Maximum of 20% counted towards EFC calculation

In recent years, 529 College Savings Plans have become increasingly popular and the savings vehicle of choice for college expenses because the money in this plan grows tax-deferred and the earnings can be used tax free for qualified education expenses. Saving money in a 529 College Savings Plan versus a regular savings account has huge tax advantages and also decreases the EFC which could make the student eligible for more financial aid. Additionally, the owner of the 529 account maintains control of these assets and is allowed to change the beneficiary. Neither of these applies to the UGMA/UTMA as once the child reaches the age of majority the assets are theirs and the beneficiary cannot be changed. For a more detailed comparison of the 529 College Savings Plan and UGMA/UTMA accounts, see the chart below.

Financial Aid

There is over $150 billion in government student aid made available every year. To even be considered for some of this financial aid, you must first fill out the Free Application for Federal Student Aid (FAFSA). Not filling out this form is the most common mistake students and parents make. While you may not qualify for federal aid, it never hurts to fill out this form. The FAFSA form will take into account parental income and assets as well as the student’s income and assets. Each of these factors carries a different weight in determining the Expected Family Contribution (EFC) and thus how much financial aid your child or grandchild will qualify for. The higher the EFC the less government financial aid will be available. Parental income is weighted between 22% – 47% in the EFC calculation. Parental assets that count toward the EFC only include non-retirement account assets. In the EFC calculation, parents are expected to contribute up to 5.64% of those assets on college every year. Student income is weighted up to 50% in the EFC calculation. Student assets can be weighted as high as 20% in the EFC calculation. Retirement assets and home value are not counted in the FAFSA EFC calculation.

As a general rule, it is better to keep assets out of the student’s name because they will be counted less towards the EFC. The exception to this is the 529 College Savings Plan described above as these assets are weighted at a maximum of 5.64%. Also, you should file your FAFSA application as soon as they become available as some financial aid is awarded on a first-come, first-served basis. Since retirement account assets do not count on the FAFSA form, do not include them in your investments! This can inflate your wealth on the FAFSA form and possibly reduce your child or grandchild’s ability to get financial aid.

As college costs continue to rise, it is important to understand how your financial situation will play into college planning. Everyone is allowed to fill out a FAFSA form, but for obvious reasons those families with significant income and assets will be given less aid, if any, versus those with families with lower incomes and assets. Even if you cannot quality for financial aid, tax efficient vehicles like 529 College Savings Plans and UGMA/UTMA accounts provide a way for money to be set aside for college and grow as your children and grandchildren age.


* Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. The availability of tax or other benefits may be contingent on meeting other requirements.

** Distributions for qualified educational expenses are not counted as parent or student income in the determination of federal financial-aid eligibility. Clients should consult their advisors about the financial-aid treatment of student-owned and UGMA/UTMA 529 accounts.

† If you choose to take advantage of the accelerated gift tax benefit and you die within five years, a prorated portion of the contribution will be subject to estate tax. If you contribute more than $13,000 in a particular year, you must file IRS Form 709 by April 15 of the following year. For more information, consult your tax advisor or estate planning attorney.