With the rising cost of higher education, thoughtful and proactive planning has become increasingly important for families looking to support children or grandchildren. Gaining a clear understanding of how financial aid is determined, especially through the Free Application for Federal Student Aid (FAFSA), and how income and assets are evaluated can meaningfully influence both a student’s eligibility for aid and the overall financial burden on the family.
One of the most effective tools for education savings is the 529 plan, which offers tax-deferred growth and tax-free withdrawals when used for qualified education expenses. Ownership within a family plays a key role in financial aid outcomes. Due to a change in 2021, distributions from a grandparent-owned 529 plan are not reported as income, and the account is not included as an asset on the FAFSA. This makes 529s owned by grandparents a better strategy for many families to support education costs without reducing aid eligibility. In contrast, a parent-owned 529 plan is assessed at a maximum rate of 5.64%, while student-owned assets can be assessed at a significantly higher rate of up to 20%. These assessment rates can reduce student aid eligibility.
The FAFSA is the most used aid application, but many private institutions also require the College Scholarship Service (CSS) Profile, which uses a more expansive review of family finances. FAFSA excludes retirement accounts and home equity and does not count grandparent-owned 529 plans. CSS, however, may include home equity, retirement savings, and 529 plans regardless of ownership. Understanding which application a college requires can help families plan and position assets accordingly.
FAFSA uses a “prior-prior year” income lookback, meaning income from two years earlier is used to determine eligibility. For instance, the 2025–2026 FAFSA will consider income from 2023. The application calculates a Student Aid Index (formerly Expected Family Contribution), which estimates how much a family is expected to contribute. A lower index generally results in a higher amount of aid.
In some cases, students may qualify as independent for FAFSA purposes and therefore are not required to report parental financial information. To qualify, a student must meet certain criteria, such as being age 24 or older, married, a veteran, pursuing graduate education, or having dependents. Independent status often leads to increased aid eligibility.
Families are encouraged to submit the FAFSA as early as possible, typically beginning in October, even if they believe they may not qualify for need-based aid. Many schools also use the FAFSA to award merit-based scholarships. Finally, keeping assets in a parent’s name rather than a student’s can be beneficial, as student-owned assets are assessed at a higher rate. With thoughtful planning and a clear understanding of these rules, families can better manage education costs and maximize available aid.
If college funding or financial aid planning is relevant to your family, we welcome the opportunity to discuss how these strategies may apply to your specific situation. Please do not hesitate to reach out to schedule a conversation, as we are here to help you make informed, confident decisions.
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