Your Child's Assets and Financial Aid: What Counts, What Doesn't

February 2, 2011

Dear Carrie,

If my child has a custodial Roth IRA, is that considered the child's asset for financial aid purposes?

—A Reader

Dear Reader,

I can answer your specific question pretty quickly: Your child's custodial Roth IRA is not considered an asset that could affect financial aid eligibility. In fact, neither students nor parents are required to report qualified retirement assets (regular or Roth IRAs, 401(k) plans, etc.) on the Free Application for Federal Student Aid (FAFSA). So when it comes to determining aid eligibility, these assets don't count. (Please note: If your child took a distribution from an IRA, that would be considered income, would be reported on the FAFSA, and would affect eligibility—but that's a very unlikely scenario.)

But even though that’s pretty straightforward, I'm glad you asked the question because the larger issue of assets and financial aid is important—and can be very confusing.

Assets: Just One Component
Your (and your child's) assets are just one part of the aid eligibility calculation. Income, of course, plays a substantial role, along with the number of people in your household, how many in your family are attending college (including you), and whether your child is a dependent. The best way to understand this is to complete the FAFSA, which you can do online at (By the way, if you are uncertain if you will qualify, you might want to consider applying anyway. You might be surprised by how much aid you can get, and the application is necessary for getting government-sponsored student loans.)

When it comes to assets, aid calculations assume that a certain percentage is available to pay for college: for parents, it's a maximum of 5.64%; for students, it's a maximum of 20%. Again, the actual "Expected Family Contribution," as it's called, will vary for a slew of different reasons, but if all things were equal, and you've got $25,000 in the bank, you'll be expected to use $1,410 before financial aid is awarded. If your child has $25,000 in a non-529 account, the school will expect $5,000 to be used before financial aid is awarded.

Obviously, therefore, it's beneficial to have fewer assets in the child's name and more in the parents' names—which is one reason custodial accounts have fallen out of favor as a way of saving for college. Custodial accounts are always in the child's name, so aid calculations assess those assets at the 20% rate.

New Rules for 529 Plans
But what about  529 college savings plans? As of July 2009, financial aid calculations treat any custodial education savings plans—529 plans (including prepaid tuition plans) and Coverdell accounts—as assets of the parents as long as the child is a dependent on your tax return. (If your child is not claimed as a dependent, those accounts are treated as the child's assets.)

In other words, 529 and other educational account assets have relatively low impact on a student's financial aid eligibility. If you're going to give money to your children for college, it might be better to consider the 529 plan vehicle rather than a traditional custodial account. (And just for the record, always keep in mind that as with any investment, it is possible to lose money in a 529 plan. Also be sure to consult a tax professional to discuss your specific circumstances.)

And remember that when it comes time to actually pay for college, 529 plan assets can only be used for qualified expenses: tuition, room and board, books and supplies, and a computer (if explicitly required by the school). Part-time students are eligible to use 529 assets to pay for many expenses if they are attending at least half-time; for those attending less than half-time, only tuition can be paid for with 529 plan assets.

There's also an interesting strategy if you have relatives who want to contribute to your child's education: A grandparent or someone else can open a 529 plan in their name, with the child as beneficiary, instead of depositing money in your plan. Since the contributor "owns" the account, it has zero impact on FAFSA financial aid calculations. (Some schools use the CSS Profile, which does request balances for any plans that name the student as a beneficiary.)

I'll close by pointing out something I hope is obvious: Financial aid should go to those who need it. I would never suggest that someone try to "game the system" to secure financial aid.  However, it is absolutely prudent and responsible for you to take complete advantage of the aid that is rightfully yours. Thanks for the question, and good luck!

Note: For more on the topic, you can go to

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction and investment strategy for his or her own particular situation. Data contained here is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

As with any investment, it is possible to lose money by investing in a 529 Plan. Before investing, carefully consider the plan's investment objectives, risks, charges and expenses. Before making an investment decision, consider whether your or the beneficiary's home state offers a 529 Plan that provides its taxpayers with state tax and other benefits not available through certain plans.

The information is not intended, and should not be construed, as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax advisors or other professionals to help answer questions about specific situations or needs prior to taking any action based upon this information.


The information on this website is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.


Learn how to manage your savings no matter where you are in life.


Use savings and debt calculators to help you reach your financial goals.

Learn More