Why this matters now

As of 2024–25 the FAFSA uses the Student Aid Index (SAI) to measure a family’s ability to pay for college; the SAI replaced the older Expected Family Contribution (EFC). The SAI and institutional formulas determine eligibility for federal, state, and many colleges’ need‑based aid. Parent contributions — whether expressed as parental savings, a direct payment to a college, a cash gift to a student, or a Parent PLUS loan — affect how much aid a student can receive. Getting this wrong can create an unexpected gap in the college budget.

I’ve worked as a CFP® and CPA helping families for more than 15 years. In practice, simple timing decisions and account choices often change a family’s aid package materially. The guidance below explains how parent contributions are counted, common mistakes, practical strategies, and safe next steps you can use today.

How the FAFSA/SAI treats parent contributions and assets

  • Parent assets and income feed into the SAI calculation submitted on the FAFSA. (See Federal Student Aid guidance at studentaid.gov.)
  • Assets owned by parents are generally assessed at a much lower rate than assets owned by the student. Student assets (savings in the student’s name or money the student controls) reduce aid eligibility at a higher marginal rate than the same funds owned by a parent. The exact assessment rates vary by family circumstances and by the SAI methodology, but the practical takeaway is: moving money into the student’s name shortly before filing the FAFSA can hurt aid eligibility more than keeping it in a parent account.
  • Retirement accounts are not reported as assets on the FAFSA, but taking money out to pay college can create taxable income and penalties that increase the SAI.”

Authoritative sources: Federal Student Aid (U.S. Department of Education), IRS education tax guidance, and NASFAA explain these distinctions in detail (see studentaid.gov; irs.gov; nasfaa.org).

Common ways parent contributions affect aid (and why)

  1. Direct parental payment to college
  • Paying tuition directly from a parent checking account does not count as ‘income’ to the student, but the underlying assets or income used to fund that payment will affect the SAI if they are reported on the FAFSA for the prior‑prior year.
  1. Cash gifts moved to the student
  • A parent gift placed in a student account before the FAFSA reporting date typically becomes a student asset, which the SAI penalizes more heavily than a parental asset.
  1. 529 plans and distributions
  • Ownership matters: a 529 owned by a parent generally counts as a parental asset and is treated more favorably than a student‑owned account. Distributions used for qualified education expenses are not reported as student income on subsequent year’s FAFSA, but rules vary — consult your plan and school financial aid office.
  1. Parent PLUS loans
  • Parent PLUS loans are a federal borrowing option. They increase available cash but are not counted as parental assets on the FAFSA. However, schools may reduce institutional need‑based aid when parents take PLUS loans, because the loan covers part of the family contribution.
  1. Timing of gifts and asset sales
  • Because FAFSA uses prior‑prior year income and current asset balances, selling assets or moving money at the wrong time can unintentionally raise the SAI.

Practical strategies families can use (what tends to work in my practice)

  • Delay large gifts or account transfers until after you file the FAFSA. A gift transferred to the student after the FAFSA snapshot date generally won’t count as a reported asset for that FAFSA cycle.
  • Favor parent-owned 529 plans over student‑owned accounts. A parent‑owned 529 is treated as a parental asset and assessed at a lower rate; qualified withdrawals don’t usually count as student income on next year’s FAFSA. For more on coordinating tax and aid tradeoffs, see our guide “Coordinating 529s and Financial Aid: Tax‑College Tradeoffs” (https://finhelp.io/glossary/coordinating-529s-and-financial-aid-tax%e2%80%91college-tradeoffs/).
  • Consider loans and payment timing as a bridge. Some families use Parent PLUS or private loans to avoid liquidating assets during FAFSA reporting years. That can preserve need‑based eligibility but increases long‑term borrowing costs; review interest and repayment terms carefully.
  • Don’t tap retirement unless necessary. Retirement accounts aren’t reported as assets on the FAFSA, but distributions can create taxable income that raises SAI and carries tax/penalty consequences.
  • Factor household size and number in college. The SAI calculation gives relief when multiple dependents attend college concurrently; the effective parent contribution per child often falls when two or more children enroll at the same time.
  • Use professional judgment appeals. If the family experiences a significant, recent change (job loss, major medical bills, one‑time events), financial aid offices can use professional judgment to adjust SAI. Document changes thoroughly and submit an appeal to the school’s financial aid office. See our practical steps in “Financial Aid Appeal: How to Improve Your FAFSA Outcome” (https://finhelp.io/glossary/financial-aid-appeal-how-to-improve-your-fafsa-outcome/).

Mistakes to avoid

  • Don’t ‘hide’ assets. Intentional misreporting on the FAFSA is fraud. Always report honestly.
  • Don’t move money into the student’s name in the months before filing. That commonly increases the assessed contribution.
  • Don’t assume all 529s are treated the same. Ownership and timing matter. If a grandparent pays directly to college from a grandparent‑owned 529, it may result in different institutional treatment.
  • Don’t rely only on federal aid rules. Many colleges use their own institutional formulas that can treat assets and income differently; check each school’s policies.

Real‑world examples (anonymized and adapted)

  • Timing problem: A family I advised paid $20,000 from a parent account into the student’s checking account two weeks before completing the FAFSA. Because the money was in the student’s account on the FAFSA snapshot date, the student’s reported assets rose and the student’s need‑based award dropped by several thousand dollars. The family later appealed, but the school’s adjustments were limited.
  • Timing help: Another family scheduled a $15,000 parental gift for after FAFSA submission and used a short‑term private loan to bridge the first semester. Their SAI remained lower and they qualified for larger need‑based grants for the academic year.

Checklist: Before you transfer money or change accounts

  1. Identify the FAFSA snapshot date and which tax year it uses (FAFSA uses prior‑prior year tax information). See studentaid.gov for the current schedule.
  2. Determine ownership: who owns the account now and who will own it after the transfer?
  3. Estimate effect: use a FAFSA estimator or the school’s net price calculator (our “FAFSA 101” guide can help beginners: https://finhelp.io/glossary/fafsa-101-a-beginners-guide-to-financial-aid/).
  4. Talk to the college’s financial aid office before making large moves.
  5. Document everything: gifts, loan documents, and dates.

When to get professional help

If you have complex assets (business interests, trusts, multiple 529s, or recent large transfers), consult a financial planner or tax professional with financial aid experience. In my practice I often run a quick simulation of SAI scenarios for clients and draft appeal letters where warranted.

Frequently asked questions (brief)

  • Will a parental gift always reduce aid? Not always: it depends on timing, ownership, and whether the gift becomes the student’s asset before the FAFSA snapshot.
  • Can I appeal if my aid drops because I gave money? Yes—contact the financial aid office and provide documentation of changes. Professional judgment can be applied for special circumstances.
  • Are retirement accounts counted? No, retirement accounts aren’t reported as assets on the FAFSA, but withdrawals may increase taxable income and thus affect the SAI.

Ethical and legal considerations

Altering account ownership or hiding funds to manipulate aid can be considered fraud. Do not attempt to circumvent reporting rules. Instead, use legitimate strategies—timing, account titling, borrowing options, and professional judgments—to optimize eligibility.

Next steps (what to do this week)

  1. Confirm the FAFSA cycle timing for your student at studentaid.gov.
  2. Run a net price calculator for likely colleges to estimate aid need.
  3. If you’re planning a large gift, speak with a CPA or financial aid advisor and the college’s financial aid office before transferring funds.
  4. Keep clear records of dates and amounts for any gifts or loans.

Sources and further reading

Professional disclaimer: This article is educational only and not personal tax, legal, or financial advice. For personalized recommendations, consult a qualified CFP®, CPA, or the financial aid office for your chosen institution.