Parents should understand how UTMA and UGMA accounts could impact FAFSA eligibility for their children before they commit to a custodial account.
- All assets belonging to a minor impact financial aid
- Both minor and parental assets are recorded on the Free Application for Federal Student Aid
- Assets belonging to a minor are weighed differently than assets belonging to parents
Convenience Can Cost You
UGMA and UTMA accounts are established by parents and guardians while their children are still young. These accounts are quick and easy to set up and serve as a depository for monetary gifts received over the minor’s lifetime. They can also serve as college savings plans, since while students advance through school their savings accounts grow. During the child’s senior year of college, as students begin the financial aid process to help alleviate some of the financial burden of college tuition, they are surprised to see the role UGMA and UTMA accounts play and the impact that custodial accounts have on financial aid eligibility.
Impact on Financial Aid
FAFSA applications can be started on January of every year, where parents, college students, and students in their final year of high school can complete the Free Application for Federal Student Aid (FAFSA) until a specified date. All assets, large and small, can potentially impact financial aid eligibility. Every asset belonging to the child (and the parents for that matter) diminishes the eligibility amount for grants and some scholarships.
Since assets in custodial accounts, such as UGMAs and UTMAs, belong to the minor, they are counted among the minor’s assets. The federal government treats assets belonging to a minor differently than those belonging to an adult. In 2016, the current financial aid formula requires that the minor contribute 20% of their assets to college costs annually prior to becoming eligible for financial aid; whereas parents must only contribute 5.6% of their assets. What this means is that UTMAs and UGMAs can hurt the minor's eligibility more than parent accounts.
Poor planning and the use of an inadequate savings account can cost thousands in lost grants, loans and other financial aid opportunities. With the increased scrutiny financial aid officers employ since the federal takeover of the US student loan program, smart planning is imperative. Luckily, other options such as specially formed irrevocable trusts help students and parents preserve positive treatment during the financial aid consideration process.
Learn more about navigating through the financial aid process and how we can help.