Filing the Free Application for Federal Student Aid (FAFSA) can feel overwhelming, and it’s easy to make small mistakes that can have big consequences. According to Federal Student Aid (2024), understanding how to classify assets correctly is critical to avoiding errors (Federal Student Aid, 2024). One of the most common (and costly) errors we’ve seen is confusion about how to report children’s vs. parents’ assets.

Recently, a client called us for advice while filling out their FAFSA. They were about to report an account that has their child listed as Transfer on Death (TOD) beneficiary as the child’s asset instead of a parental asset. While this may seem like a minor detail, misclassifying assets like this can dramatically impact the Expected Family Contribution (EFC) (Federal Student Aid, 2024).

In this case, the mistake could have cost the family $10,000 in financial aid eligibility.

Why Asset Classification Matters on FAFSA

The FAFSA uses your family’s income and assets to determine the EFC—the amount your family will be expected to contribute toward education costs. 

Here’s the critical difference:

Parental assets (savings, investments, or accounts like TOD accounts under the parent’s name) are assessed at up to 5.64% when determining EFC. Whereas student assets (accounts or investments owned by the child) are assessed at a much higher rate of 20%.

Misclassifying a parental asset as a student asset can inflate your EFC and reduce your aid eligibility—potentially costing you thousands of dollars.

Common FAFSA Mistakes: What You Should Know

1. Transfer on Death (TOD) Accounts: Many parents set up accounts in their own names but earmark the money for the child and name the child as the beneficiary using a TOD designation. Even though it may be earmarked for the child, it is considered a parental asset. If you mistakenly report it as the child’s asset, it will be assessed at a higher rate.
2. ABLE Accounts. ABLE accounts are tax-free accounts for people with disabilities. Regardless of whether the account is owned by the parent or the child, ABLE assets do not get reported on the FAFSA form at all.
3. 529 College Savings Plans:  A 529 plan owned by the parent or dependent student is considered a parental asset, but a 529 owned by a grandparent or other relative is not reported on FAFSA.This is another area where we see a lot of mistakes. As long as the student is a dependent of the parent, even 529s owned by the children are still reported as a parental asset!
4. UGMA/UTMA Accounts: These custodial accounts are considered student assets because the child is the account’s owner.
5. Joint Bank Accounts: If the child’s name is on a joint account primarily used by the parent, report only the portion of funds that belong to the student.
6. Other Investments: Real estate, stocks, bonds, and mutual funds are assessed differently depending on ownership. Be sure to clarify ownership before reporting.
7. Retirement accounts. Retirement accounts, whether owned by the parent or student are not required to be reported on the FAFSA.
8. Home equity. Home equity in the primary residence need not be reported but if you own a second home like a vacation property or rental property, the equity in the property must be reported as assets of the parent.

How to Avoid FAFSA Filing Mistakes

FAFSA can be tricky, and asset reporting is often where families slip up. 

To ensure you’re maximizing your financial aid eligibility:

• Double-check ownership: Before you report any asset, confirm whether it is owned by the parent or the student.
• Understand FAFSA guidelines: Not all accounts and savings are treated equally.
• Seek professional advice: Consulting with a financial advisor can help you avoid costly errors and ensure you’re getting the aid you deserve.

Need Help Filing FAFSA? We’re Here to Guide You

At Kramer Wealth Managers, we work with families to navigate complex financial decisions, including the college funding process. Don’t let simple mistakes cost you thousands in lost financial aid.

Schedule a consultation today and let us help maximize your financial plan.