FAFSA strategy: Best savings account for second child to maximize aid for first child in college?

My oldest started college this fall, and I'm learning how brutal FAFSA asset calculations can be! My younger child (7th grade) has about $5,800 in a regular savings account from birthdays and odd jobs. My college freshman has around $8,700 in their own savings account. I've heard conflicting advice about what type of account my younger child should use going forward to minimize the impact on my older child's financial aid eligibility. Should we move the younger child's money to a 529? Custodial account? Leave it where it is? We're firmly in that frustrating middle-income bracket where we make too much for significant grants but not enough to comfortably pay full price. I want to make sure my younger child's savings aren't unnecessarily counting against my older one on the FAFSA. Any insights from those who've navigated this successfully?

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11 comments

Diego Flores

•1y

The key thing to understand is how assets are treated in the FAFSA's SAI (Student Aid Index) calculation. Parent assets are assessed at a maximum of 5.64%, while student assets are assessed at 20%. So $5,800 in your child's name would reduce aid eligibility by about $1,160, but only by about $327 if counted as a parent asset. A 529 plan with you as the owner (not custodial) and your younger child as the beneficiary is counted as a parent asset on the FAFSA, not a student asset. This means it would be assessed at that lower parent rate rather than the higher student rate. A custodial account (UTMA/UGMA) is still considered the child's asset and would be assessed at the higher 20% rate for FAFSA purposes. If you move the younger child's regular savings into a parent-owned 529, you'll likely improve your older child's aid eligibility.

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Amelia Cartwright

•1y

@Anastasia Kozlov That s'a great question! 529 plans do have some restrictions, but they re'not as limiting as many people think. The money can be used for qualified education expenses including tuition, fees, books, supplies, and room/board at eligible institutions - not just traditional 4-year colleges but also trade schools, community colleges, and even some international schools. If your child doesn t'go to college, you have several options: transfer the beneficiary to another family member siblings, (cousins, even yourself ,)use it for K-12 tuition up (to $10k/year ,)or withdraw the money and pay a 10% penalty on earnings but (not the principal .)Recent changes also allow 529 funds to be rolled into a Roth IRA under certain conditions. Given that we re'talking about a 7th grader here, there s'plenty of time to see how things develop, and the FAFSA benefits probably outweigh the flexibility concerns for most families.

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Sean Flanagan

•1y

I had this exact same problem with my kids (now 21 and 15). The financial aid system is COMPLETELY BROKEN when it comes to middle class families. We made just enough to get almost no aid but not enough to actually afford the ridiculous costs. It's insane! Everything I tried barely made a difference. We moved some money around, did the 529 thing, and I think we maybe got an extra $1000 in aid. That's NOTHING compared to the $37K/year we're still expected to pay somehow. The whole system is rigged against families like ours. My advice? Focus less on these small optimizations and more on finding schools with merit scholarships that aren't based on FAFSA calculations.

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Zara Mirza

•1y

Have you tried calling the Federal Student Aid office to ask them directly? I spent 3 hours on hold then got disconnected twice trying to get an answer about asset questions. Finally used Claimyr.com and got through to an agent in about 10 minutes. They have a service that calls and waits on hold for you then connects you when an agent picks up. Saved me so much frustration! There's a video showing how it works at https://youtu.be/TbC8dZQWYNQ The FSA agent was actually super helpful and explained exactly how different account types affect the SAI calculation. Definitely worth talking to them directly since every family situation is different.

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NebulaNinja

•1y

One thing no one has mentioned yet - if you're concerned about maximizing aid for your older child, prioritize spending from your younger child's accounts for any current needs (assuming that's legal and ethical in your situation). The reality is that parents often overthink FAFSA strategies. Unless you have substantial assets, the student income and parent income factors usually have a much bigger impact on your SAI than the student assets component. For your specific situation, I'd recommend: 1. Move younger child's savings to a parent-owned 529 2. Focus on maximizing institutional aid and merit scholarships 3. Consider an income-driven repayment plan for any federal loans 4. Look into schools that meet full demonstrated need if your finances truly make college a stretch Remember that the FAFSA changed significantly for 2024-2025 with the new SAI formula, so older advice may no longer apply.

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Diego Flores

•1y

That's concerning to hear, but it's important to note that this would be extremely unusual for regular federal aid through FAFSA. Was your sister applying to highly selective private schools that use the CSS Profile? Those schools often conduct a much deeper financial analysis and may have their own institutional methodologies. The standard federal methodology for FAFSA doesn't include any formal mechanism to track asset movements or request years of bank statements. However, if selected for verification, some schools might request additional documentation, especially if large sums are involved or if there are discrepancies in the application.

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