How—and when—to spend your college savings

The accounts you use to write tuition checks may have consequences for financial aid.

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Key takeaways

  • A variety of savings accounts for education are available to parents, grandparents, and others.
  • The amount of money you have in various types of accounts may affect your student's eligibility for financial aid.
  • Withdrawing money from these accounts in a certain order may increase the amount of financial aid your student can receive.

If you have more than one account for college savings, managing the order in which you withdraw money from your accounts to pay tuition may help improve your family's eligibility for financial aid. Managing financial aid eligibility can play an important role in financing a college education.

Your EFC—and why it matters

With tuition costs continuing to rise, even families who have saved diligently for years expect their savings to cover only a portion of their child's expected college expenses and they look to financial aid to help with the rest. Financial aid generally includes subsidized government loans with relatively attractive interest rates that don't require repayment while the student is in school. Colleges may also offer grants, scholarships, or tuition discounts to qualified students. Unlike loans, these don't need to be repaid after graduation.

Colleges determine the amount of financial aid you qualify for using a calculation known as the expected family contribution, or EFC. Your EFC is determined by your family's income, assets, and the number of members. The lower your EFC, the greater your eligibility for financial aid.

The order in which you spend your assets depends on your personal financial situation and your financial advisor can help you determine the best course for you and your student. All else being equal, though, the order in which you tap various types of accounts to pay tuition and other school expenses matters because it can raise or lower your EFC and your eligibility for financial aid. "For example, a withdrawal from a 529 owned by a grandparent during the first 2 years of college could be considered income of the child, which could really impact your financial aid," says Melissa Ridolfi, Fidelity vice president, Retirement and College Leadership. That's because the value of assets and income belonging to students have a far greater impact than parents' assets or income when financial aid eligibility is calculated. For example, 20% of a student's assets are considered when determining an EFC but only 5.64% of parents' assets.

With this in mind, you might want to consider this order when tapping your college savings accounts.

1. First, consider spending the money in your UTMA/UGMA brokerage account, if you have one. These accounts let parents (and others) make an irrevocable gift to a minor that can be used for college or any other purpose. Assets in the account belong to the student and earnings on them are generally subject to the minor's tax rate, which is usually lower than the parents' rate. You may want to spend the money in an UGMA/UTMA account first because it has the greatest impact of any type of account in raising your EFC. These accounts are also subject to tax each year, so paying tuition from these accounts before others can lower your tax bill and raise your eligibility for financial aid.

3. Next, you might want to turn to any 529 savings accounts belonging to the student's parents. 529s are flexible, tax-advantaged education savings accounts funded with after-tax dollars. You may contribute as much as 5 years' worth of contributions or $75,000 at one time. When you withdraw money to pay for higher education expenses such as tuition, fees, and room and board, it is not subject to federal income tax.

4. While you can spend from a parent-owned 529 at any time during college without negative consequences, a grandparent-owned 529 may be best saved until the final 2 years. Withdrawals from these accounts may be counted as income for the student and using them earlier in school could significantly raise your EFC and lower your financial aid eligibility.

5. Finally, after these other accounts are spent down, tuition can also be paid from taxable brokerage, savings, or checking accounts owned by parents.

Retirement savings accounts are not well suited to paying for tuition and other educational expenses. Strategies used to grow assets in these accounts often include time horizons and asset allocations that leave them poorly suited to funding education. Also, while there are loans available to cover shortfalls in education savings, there are no similar alternatives for those whose retirement savings run out because they spent down their retirement savings to pay tuition.

Putting it into practice

To see how following these suggestions could make a difference, consider a hypothetical household with an annual income of $75,000. Their college savings include $10,000 in an UGMA, $25,000 in the parents' 529, and $15,000 in the grandparents' 529. They need to withdraw $12,500 a year for 4 years of tuition. If they tap their accounts in the order listed, their EFC would decline from $10,881 in their student's first year of college to $7,644 by their senior year. If instead, they opted to spend the grandparents 529 first and saved the UGMA until the last year, their EFC would instead spike upward to $12,638 in year 3 and decline only to $9,931 by the fourth year of college.

The principle holds true for families with higher incomes and more assets as well. A hypothetical household with an annual income of $250,000, $10,000 in an UGMA, $105,000 in the parents' 529, and $25,000 in a grandparents' 529 and a need to withdraw $35,000 a year for 4 years would see its EFC drop from $74,270 in year 1 to $65,792 by year 4 if they spent the UGMA first and saved the grandparents' 529 for the last 2 years. If they instead drew down the grandparents' 529 first and saved the UGMA until the final year, their EFC would instead rise to $79,470 in year 3 and only fall to $67,913 the year after that.

Improving your family's odds of landing financial aid is an important part of paying for college. But remember, nearly 40% of financial aid packages include loans that must be repaid and the College Board estimates that the average debt burden for recent college graduates averages between $24,000 and $30,000.

To help your student avoid college debt, make sure you understand how much it may cost and think about contributing to a dedicated college savings account. Even if they're entering college next year, you'll still have 5 years to save for tuition.

Next steps to consider



Save & invest for college


Open a flexible, tax-advantaged 529 college savings plan.



Transfers from a 529 account


You have options when it's time to pay college expenses.



529 plan FAQs


Have more questions about paying for college? Find answers here.

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