<p>I have a question on how investments affect financial aid, but first a bit of background:</p>
<p>Earlier this year, I had planned to start college this upcoming fall, but decided to wait instead. That gave my parents and me the chance to file the FAFSA and see my EFC. It wasn't really high, and I was approved for about $4500 from the Pell grant. Anyway, I'm wondering whether I should build some investments in the meantime with a few hundred dollars that I have; I believe it's 20% of student assets that are added to the EFC. So with all that in mind, will the money I earn from any investments (stocks, bonds, mutual funds) be offset with decreased financial aid? Or will the income generated justify the investments?</p>
<p>Also, since I'm close to college age, would a "guaranteed" 529 savings plan be a good bet, keeping tax benefits in mind? You know, the ones that guarantee the principal plus a small percentage of interest?</p>
<p>Thanks in advance everyone.</p>
<p>If you only have a few hundred dollars, and those funds were reported in last year’s FAFSA, it’s unlikely that any additional earnings on those investments will increase your EFC very much. You have an income protection allowance of around $5000, so you can earn dividends on your investments up to that point with no EFC penalty.</p>
<p>The guaranteed 529s typically require that the funds be in place for 3 years before they can be used to pay tuition. This might not work out so well for you - you might do better with a regular student-owned 529.</p>
<p>Money in your name will be assessed at the rate of 20% for FAFSA, while money in a 529 is only assessed at the rate of 5.6%.</p>
<p>@vballmom: Thanks for your reply. The money that I have wasn’t reported on the FAFSA; I didn’t get it from a job or anything, it’s just gifts that I’ve saved over the years. Would any gains that I receive from investments count towards the income protection allowance, or are assets calculated separately?</p>
<p>Also, what’s the benefit of a student-owned 529? I’m a dependent student, and I’ve read that it’s best to have it in the parent’s name.</p>
<p>@happymomof1:</p>
<p>Thanks for the link! I’m pretty sure that my EFC would go up, but I’m more interested in how a few hundred dollar difference either way in the EFC would affect the Pell grant.</p>
<p>If you can work with your parents, they can do a stock plan or other investment for you in their names. You can pay them the money for expenses they cover for you, and that can be their nest egg to use towards whatever they please, including saving the proceeds as a graduation gift to you or paying your college costs.</p>
<p>The PELL is not an all or nothing grant. It phases out according to asset and income amounts. As Happymom suggested, the best way to see the EFC changes is to get the chart that shows you the EFC amounts and the corresponding PELL and then play around with on line estimators to see what scenario does what.</p>
<p>Do you know if you qualify for the Simplified Needs Test? Is your parents AGI less than $50,000? Do they file 1040A or 1040EZ? Or do you receive a means tested benefit such as free/reduced lunch or food stamps? If so I don’t think student earnings or assets are counted.</p>
<p>If your EFC does change by a few hundred dollars, then yes your Pell Grant will be reduced accordingly dollar for dollar as the EFC increases. If you lose Pell eligibility you may lose other grants as well like SEOG. I think some state programs use Pell eligibility as a cutoff. What state are you in?</p>
<p>Assets are reported separately from income on FAFSA. Students do not have an asset protection allowance but parents do. Students have a smaller income protection allowance than parents (a little over $5000).</p>
<p>When you fill out FAFSA, you need to report your assets as of the date you fill out the form (usually January or February). Assets include cash, money in checking and savings accounts, and any investments other than retirement investments.</p>
<p>Money you own as a minor is your money. If you want to invest it, and you’re still a minor, you’d need to open a custodial account with your parents as custodians. This is true for typical custodial accounts which are called UTMAs, and also for 529s. The account is in your name, with your SSN, but your parents are named custodians. You can buy stock, mutual funds, bonds, options, etc, all within these accounts. Then when you turn 21 or 18 (depending on the state), the account will be yours alone. </p>
<p>Since you were asking about how to invest your money, I suggested a student-owned 529. If your parents wanted to invest their money, they can open a parent-owned 529 with you as the beneficiary. Parent-owned 529s are much more flexible than student-owned 529s. In a parent-owned 529, the beneficiary can be changed. A student-owned 529, since it was funded by the student’s money to begin with, remains with the student and cannot be transferred to someone else.</p>
<p>All 529s, whether student or parent-owned, are assessed at the parent rate of 5.6% for FAFSA. A quirk in the law is that grandparent-owned 529s are not reported on FAFSA - this may or may not be of interest to you and your parents.</p>