How Custodial Accounts Affect Financial Aid (FAFSA)

Here's a fact that surprises a lot of parents: two kids can have the exact same amount saved and receive very different financial-aid packages — purely because of which account the money sits in. The FAFSA doesn't just look at how much you've saved; it cares a great deal about who owns it.

This isn't a reason to panic or to stop saving. It's a reason to understand the rules so the wrapper you choose works with your aid picture instead of against it.

The core idea: student assets vs. parent assets

The current FAFSA calculates a Student Aid Index (SAI) — the number that drives need-based aid. Assets feed into it at very different rates depending on who owns them:

• Parent-owned assets are assessed at a maximum of about 5.64%.
• Student-owned assets are assessed at a flat 20%.

So $10,000 in a parent's name raises the SAI by up to ~$564; the same $10,000 in the student's name raises it by $2,000. Same dollars, nearly four times the impact on aid.

How each account is treated

The standout is the UTMA: because it's legally the child's money, it lands in the most heavily-assessed bucket. That's the single biggest aid trade-off in the custodial world.

Two things the new FAFSA changed

• Grandparent 529s got friendlier. Under the older rules, money a grandparent's 529 paid toward tuition counted as untaxed student income — a brutal hit. The current FAFSA no longer asks about that cash support, so grandparent-owned 529s are far less of a landmine.
• Retirement accounts still aren't reported as assets. A custodial Roth IRA's balance doesn't show up on the FAFSA at all — one more reason it's a quietly aid-friendly place for a working teen's money.

How to think about it (without over-optimizing)

A few principles keep this in proportion:

1. The wrapper matters more than the balance. If college aid is a real factor for your family, leaning toward parent-owned (529) over student-owned (UTMA) is the highest- leverage choice you can make.
2. Don't let the aid tail wag the dog. Aid formulas change, and not every family qualifies for need-based aid anyway. A UTMA's flexibility may be worth more to you than a marginal aid difference — that's a real trade-off, not a wrong answer.
3. Timing can matter. The FAFSA uses a prior-prior tax year, so where assets sit in the years leading up to college is what counts — not a last-minute shuffle.
4. Talk to the school's aid office. Some private colleges use the CSS Profile, which has its own rules. The FAFSA is the floor, not the whole story.

What to do this week

1. List your kid's accounts and tag each as student-owned (UTMA, brokerage) or parent/retirement (529, Roth).
2. If aid is a factor and you're early, weigh favoring parent-owned wrappers for new contributions.
3. Don't unwind a UTMA reflexively — talk through the flexibility-vs-aid trade-off with a tax or aid advisor.
4. Keep every account in one view in MemoryBank so the ownership picture is clear long before FAFSA season.