College Funding: Watch Out for Joint Accounts Impacting Financial Aid

By Patrick Diamond, CFP®

TL;DNR:

• Joint accounts between a parent and another family member, such as a grandparent, can unintentionally affect a student’s college financial aid eligibility.

• Income generated by a joint account may be counted as parental income on the FAFSA, which is heavily weighted in aid calculations.

• The value of a joint account typically must be reported as a parental asset on the FAFSA, even if the parent did not contribute the funds.

• Parental income and parental assets are treated differently in financial aid formulas, and joint accounts can negatively impact both.

• While joint accounts can be a simple estate planning or convenience tool, they carry financial aid and planning drawbacks that should be carefully considered.

Joint Bank Accounts and Investment Accounts: Income and Assets That Can Impact Financial Aid

When families begin planning for college costs, they often focus on tuition, savings plans, and financial aid forms. One issue that is frequently overlooked is how everyday bank and investment accounts are titled.

In particular, joint accounts—such as a checking, savings, or brokerage account held jointly between a parent and a grandparent—can create unintended consequences when it comes time to apply for financial aid. These accounts may feel convenient and harmless, but they can complicate the financial aid picture in ways many families do not anticipate. With interest rates still in the 4% range, joint accounts can generate material amounts of income.

The Free Application for Federal Student Aid (FAFSA) looks closely at both income and assets of the parents of a college-bound student, and it treats those two items very differently. Income, such as interest, dividends, or capital gains generated by an account, is generally weighted more heavily in the financial aid formula than assets (22-47% of available income versus 5.64% of unprotected assets). If a grandparent owns an account jointly with the parent, any income reported under the parent’s Social Security number may increase the parent’s reported income, potentially reducing eligibility for need-based aid. In addition, because the account is jointly owned, the full value of the account (or a presumed share of it) typically must be listed as a parental asset on the FAFSA—even if the grandparent provided most or all of the funds. This combination of higher reported income and higher reported assets can materially affect financial aid outcomes.

By unintentionally shifting a grandparent’s assets and income into the parent’s financial profile through a joint account, families may be increasing the “Student Aid Index/SAI” (formerly called the “expected family contribution/EFC”) used in aid formulas. In many cases, families are surprised to learn that an account they viewed as belonging to a grandparent is effectively counted against the student when it comes to financial aid.

Joint accounts are often used for reasons that have nothing to do with college funding. They can be a simple way to help with bill paying, provide convenience if someone becomes ill, or serve as a basic estate planning tool by allowing assets to pass automatically to the surviving owner at death. While this simplicity can be appealing, joint accounts also come with drawbacks. In addition to potential financial aid issues, they can create creditor exposure, complicate control over funds, and result in outcomes that do not align with broader estate planning goals. For families with college-bound children, it is especially important to weigh these trade-offs carefully and consider whether alternative approaches may better balance convenience, estate planning, and financial aid considerations.

The key takeaway is that account titling matters. Well before completing the FAFSA (i.e., years before) or adding family members to existing accounts, families should understand how these decisions may affect financial aid eligibility. A small administrative choice today can have a meaningful impact on college funding tomorrow.

*Disclaimer: This blog post is for informational and educational purposes only. The information contained in this blog post is not legal, tax, or investment advice.