How ownership changes financial aid, taxes, and control

Who legally owns an education account matters because colleges and federal aid formulas treat parental, student, and third-party assets differently. For many families, ownership decisions are about three tradeoffs: preserving financial aid eligibility, keeping tax benefits, and retaining control over how funds are spent.

Key account types and typical ownership patterns

  • 529 college savings plans: commonly owned by a parent or other adult (sometimes a grandparent). Contributions grow tax-deferred and qualified withdrawals are federal income–tax free (see IRS guidance on 529 plans and Publication 970) https://www.irs.gov/.
  • Coverdell Education Savings Accounts (ESAs): often owned by a parent; also provide tax-free withdrawals for qualified expenses but have income and contribution limits (IRS Publication 970).
  • Custodial accounts (UGMA/UTMA): owned by the child once they reach the age of majority in their state; treated as the student’s asset for financial aid.

The financial aid effect in plain language

Federal student aid formulas and most college financial aid offices view student-owned assets as more harmful to need-based aid eligibility than parent-owned assets. Historically, student assets could be assessed at a much higher rate than parental assets, meaning a dollar in a student-owned account reduced need-based aid eligibility more than a dollar in a parent-owned account. Because federal formulas and institutional practices change from time to time, always confirm current rules at Federal Student Aid (studentaid.gov).

Tax basics to remember

  • Qualified distributions from 529 plans and Coverdell ESAs are federal income tax–free when used for eligible education expenses; nonqualified distributions may be subject to income tax on earnings plus a 10% additional tax unless an exception applies (IRS Publication 970).
  • Ownership itself does not change the federal tax advantage of qualified 529 withdrawals. The owner (whoever controls the account) is typically responsible for tax reporting on nonqualified distributions.
  • State tax benefits vary by state. Many states offer a tax deduction or credit for contributions to the state’s 529 plan and those benefits are tied to the contributor’s state residency and the account owner.

Control and flexibility

  • Parent ownership: Parents keep control of the account — they choose when and how to use distributions and can change the beneficiary to another qualifying family member without tax penalty. This control is why many families prefer parent ownership when college is several years away.
  • Student ownership: The student (or custodial account that becomes the student’s at majority) controls distributions. That can be useful for teaching financial responsibility, but it reduces parental control and may complicate timing and use of funds.
  • Third-party owners (e.g., grandparents): A grandparent-owned 529 may offer estate-planning advantages for grandparents, but it can have different implications for financial aid. Historically, distributions from a grandparent-owned account could reduce aid eligibility in later aid calculations; check up-to-date guidance before relying on this strategy.

Real-world examples (illustrative)

  • Parent-owned 529: A family opens a 529 plan with the parent as owner and contributor. When the student files the FAFSA, the account is treated as a parental asset; that typically reduces aid eligibility less than if the same dollars were in the student’s name.

  • Student-owned custodial account: A parent gifts money to a custodial account that legally belongs to the child. At the time of the FAFSA, custodial assets are treated as student assets, which historically have a larger negative effect on need-based aid.

Practical strategies and professional tips

  1. Default to parent ownership when maximizing need-based aid is a priority
  • For dependent students, parent-owned 529 plans usually produce a smaller hit to need-based aid than student-owned or custodial accounts. In my practice advising families, retaining parent ownership until after the student files the final FAFSA can preserve eligibility for grants and subsidized loans.
  1. Time distributions to reduce aid impact
  • If a 529 is owned by a grandparent or other non-parent, consider the timing of withdrawals. Historically, distributions from a grandparent-owned 529 were treated as student income on the next year’s aid application; making distributions in a calendar year when the student has already graduated or will not apply for need-based aid can avoid unintended reductions. Because aid rules and FAFSA methodology evolve, check current guidance at studentaid.gov and consult an advisor before acting.
  1. Use beneficiary changes and rollovers smartly
  • 529 plans allow beneficiary changes to other qualified family members and certain rollovers between plans. These tools can preserve tax benefits and avoid having assets sit in student-owned accounts that hurt aid eligibility. FinHelp has a guide on 529 Plan Beneficiary Management: When and How to Change Names with practical steps.
  1. Consider hybrid savings strategies
  • Families often split savings across vehicles: a parent-owned 529 for primary college funding, a small custodial account for student spending and local experiences, and a Roth IRA for a student (if they have earned income) to preserve retirement/tax flexibility. See our primer on Education Savings Tradeoffs: 529 Plans vs UTMA vs Trusts for a deeper comparison.
  1. Don’t overlook state tax rules and gift-tax considerations
  • Many states provide state income tax benefits for contributions to their 529 plans; those rules depend on the contributor’s residency. Contributions to 529s are treated as completed gifts for federal gift-tax purposes and can use the annual gift-tax exclusion or the five-year election to spread a larger contribution over five years. Consult a tax advisor and your state’s plan documents for specifics.

Common mistakes and misconceptions

  • “It doesn’t matter who owns the account.” Ownership can materially affect need-based aid and control over funds. Treat the decision strategically.
  • Transferring ownership without checking tax and aid consequences: Don’t change titles or roll funds to a student-owned account shortly before filing FAFSA without understanding the consequences.
  • Confusing beneficiary and owner: The beneficiary is the student who can use the funds; the owner is the person who controls the account. Ownership changes can have different legal and tax effects than beneficiary changes.

Timing and financial aid paperwork

  • When filing the FAFSA or submitting CSS/Profile materials, report accounts accurately and follow the current instructions from Federal Student Aid and individual colleges. The federal guidance at Federal Student Aid (studentaid.gov) outlines how different asset types are considered. Institutional forms (e.g., CSS Profile) may ask additional questions and treat assets differently.

FAQ (short answers)

  • Can I change the owner of a 529 plan? Many states permit changing the account owner, but state rules and gift-tax consequences may apply. Use beneficiary changes and owner changes carefully and consult plan documents.
  • Will keeping a 529 in my name reduce my child’s aid? Compared with student-owned assets, parent ownership typically reduces aid less. The exact dollar effect depends on the federal methodology and the college’s practices.

Authoritative sources and where to learn more

Professional disclaimer

This article is educational and does not constitute individualized financial, tax, or legal advice. For tailored recommendations about account ownership, tax consequences, and financial aid planning, consult a qualified financial planner, tax professional, or the college financial aid office.

Bottom line

Ownership is a planning decision that affects control, taxes, and financial aid. For families focused on maximizing need-based aid, parent ownership of a 529 or Coverdell ESA is often the most practical choice. If other goals—teaching financial responsibility, estate planning, or giving grandparents a role—matter more, weigh those priorities and consult professionals to balance aid, taxes, and control.