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How Does FAFSA Affect Estate Planning?

The 2025-26 FAFSA introduces sweeping changes that revolutionize how families apply for college financial aid. While these updates streamline the application process, they also create new considerations for FAFSA and estate planning. If you’re planning for your child’s education and your legacy, it’s time to take a closer look at how your financial decisions today could impact both.

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Why FAFSA and Estate Planning Go Hand in Hand


The Free Application for Federal Student Aid (FAFSA) evaluates a student’s financial need based on income and assets—but how those assets are owned makes all the difference. Parent-owned assets are assessed at just 5.64%, while student-owned assets get hit at a much higher 20% rate. That means if your child has $10,000 in a custodial account, FAFSA assumes $2,000 should go toward tuition—potentially reducing their aid package.

And it’s not just about the numbers. The way you structure your assets through tools like trusts or retirement accounts can dramatically shift how much aid your child receives.

Smart Financial Aid Strategies for Your Estate Plan


Here are several financial aid strategies to help families protect both their wealth and their children’s financial aid eligibility:


Use FAFSA-Friendly Accounts

Parent-owned 529 college savings plans are typically your best bet. Avoid placing large sums in UGMA/UTMA custodial accounts, which are fully assessed under student ownership rules.


Don’t Overlook Retirement Accounts

Assets in retirement accounts like 401(k)s and IRAs are not counted by FAFSA. If you have extra savings, consider moving them into retirement accounts—it protects your child’s aid eligibility while supporting your long-term goals.


Avoid Income Surprises

FAFSA considers income in the year before the application is filed. If you’re expecting a large bonus or planning to sell an asset, delay it until after filing to avoid increasing your Expected Family Contribution (EFC).


Be Cautious With Trusts

Irrevocable trusts can be a great estate planning tool—but they may still count against your student’s financial aid if they’re a beneficiary. Always consult a financial planner or estate attorney before setting one up with education in mind.


Optimize Your College Savings Plan Without Sacrificing Your Legacy


You shouldn’t have to choose between a strong estate plan and maximizing financial aid. With a bit of strategy, you can do both. By taking steps now—like shifting assets to FAFSA-friendly accounts and reviewing your ownership structures—you can preserve your family’s legacy and support your child’s education.

This article is a service of The Ambitious Legacy Firm. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Legacy Planning Session, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by using the link below to schedule a call with our Client Services Director, who will be able to guide you on scheduling your Legacy Planning Session.


WE CARE ABOUT YOUR LEGACY. LET US HELP YOU PLAN IT!



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