When preparing for college expenses, every dollar counts. From scholarships to savings accounts, families explore various financial avenues to ease the burden of tuition. One often-overlooked topic that can have an outsized impact on college costs is how UGMA accounts (Uniform Gifts to Minors Act) influence financial aid eligibility.
If you or your child has an UGMA account, understanding how these assets are assessed can help you plan better—and avoid surprises when it’s time to submit the Free Application for Federal Student Aid (FAFSA). This guide breaks down everything you need to know about UGMA accounts and their effect on financial aid in 2025.
What is an UGMA Account?
Before we jump into financial aid specifics, it’s essential to understand what an UGMA account is.
UGMA accounts are custodial accounts that allow parents, relatives, or other donors to gift assets to a minor without establishing a trust. These accounts can hold cash, stocks, bonds, and other financial instruments. While the assets legally belong to the minor, they are managed by an appointed custodian until the child reaches the age of majority (usually 18 or 21, depending on the state).
UGMA accounts are frequently used for educational savings due to their simplicity and tax benefits, such as avoiding the complications of setting up a formal trust. However, these accounts are fully the child’s asset, which makes them subject to specific rules when it comes to financial aid calculations.
Key Features of UGMA Accounts:
- Assets legally belong to the minor.
- Funds can be used for any purpose that benefits the child.
- Tax benefits may apply to the assets’ earnings.
- Funds are irrevocably transferred to the child.
Now that you’re familiar with the basics, let’s explore how UGMA accounts are treated under the FAFSA and other financial aid programs.
UGMA Accounts and FAFSA
When determining a student’s financial aid eligibility, the FAFSA assesses contributions from both parents and students, assigning a weight to each party’s assets. Unfortunately for UGMA account holders, funds in these accounts are classified as student-owned assets, which are heavily weighted in the financial aid calculation.
How Student-Owned Assets Are Assessed
Under the FAFSA formula, student-owned assets are assessed at a 20% rate. This means that 20% of the UGMA account’s value is added to the Expected Family Contribution (EFC), which reduces the amount of financial aid a student may receive.
For example:
- A student with an UGMA account valued at $20,000 would see $4,000 (20% of $20,000) reported as part of their family’s EFC.
- This $4,000 could significantly impact how much aid the student is awarded, especially for need-based programs like Pell Grants or subsidized loans.
By contrast, parental assets, such as 529 plans, are assessed at a maximum rate of 5.64%, making UGMA accounts less favorable when it comes to financial aid considerations.
What About CSS Profile Schools?
For students applying to schools that require the CSS Profile (used by many private colleges), the treatment of UGMA accounts may differ slightly. CSS Profile schools often use a more detailed methodology to calculate financial need and may treat UGMA accounts differently depending on how the assets were spent or saved. Be sure to consult the specific policies of the colleges in question.
Strategies to Minimize the Impact of UGMA Accounts
While UGMA accounts can complicate financial aid eligibility, there are strategic steps you can take to minimize their impact. Below are some proven strategies for families to consider:
1. Spend Down the Account Before College
One common strategy is to utilize UGMA account funds before the student applies for financial aid. The funds can be used for expenses that directly benefit the child, such as:
- Summer camps
- Private school tuition
- SAT/ACT prep courses
Reducing the account balance means less will be calculated as part of the student’s assets come FAFSA filing time.
2. Convert to a 529 Plan
Another option is to convert UGMA funds into a 529 College Savings Plan. While UGMA-to-529 transfers are allowed, they come with some caveats:
- The 529 plan will still be categorized as a student-owned asset, but with a lower assessment rate (5.64% instead of 20%).
- Once the funds are transferred, they must be used for qualified education expenses to avoid penalties.
This strategy is particularly effective if you’re confident the funds will go toward college costs.
3. Use UGMA Funds Post-Graduation
If the UGMA account balance is significant, another approach is to avoid using the funds for undergraduate expenses altogether. Instead, they can be saved for graduate school tuition, which often relies less on need-based aid calculations.
4. Name Refunds or Cash Awards as Parental Assets
Families can also shape their financial profile by ensuring other refunds (e.g., from overpayment of tuition or scholarships) are deposited into accounts categorized as parental assets rather than being reinvested into the UGMA account.
Balancing UGMA Accounts With Other Savings Vehicles
While UGMA accounts have their merits, they may not be the best standalone solution for funding education. Many families find more flexibility and fewer financial aid complications with other vehicles, such as:
- 529 College Savings Plans (as mentioned earlier)
- Coverdell Education Savings Accounts
- Taxable Brokerage Accounts held under the parent’s name
When creating a comprehensive savings strategy, consult a financial advisor to balance long-term goals with immediate needs.
Common Misconceptions About UGMA Accounts and Financial Aid
Myth 1: UGMA Accounts Disqualify You From Financial Aid
This is false. While UGMA accounts reduce eligibility, students will not automatically be disqualified. Aid eligibility depends on a holistic financial profile.
Myth 2: UGMA Transfers Can Be Reversed
Once funds are transferred to an UGMA account, they are irrevocable. Parents or donors cannot withdraw or reclaim these funds, so any unused balance belongs to the student once they reach adulthood.
Myth 3: UGMA Accounts Have No Tax Implications
While UGMA accounts do offer certain tax advantages, minors with investment income exceeding specific thresholds may need to file their own tax returns. Consult a tax advisor for guidance.
What Changes Are Coming for 2025?
Starting with the 2025-26 academic year, the Department of Education will implement new FAFSA simplification measures. While these changes may not directly target UGMA accounts, a streamlined form and recalibration of the EFC could have indirect implications. Stay tuned for further updates as more details are released.
Navigating the Financial Aid Landscape
Understanding how UGMA accounts affect financial aid eligibility is vital for families planning for college costs. While these accounts can serve as a valuable savings tool, their treatment in the FAFSA formula means careful planning is essential to make the most of their benefits.
If you’re considering opening an UGMA account or want to assess its impact on your financial aid strategy, speaking with a professional advisor is an effective next step. With the right knowledge and strategy, you can ensure your financial choices align with your goals—both for today and the future.
