My daughter got a settlement. What happens to the FAFSA?


Q. My daughter and I have co-owned a no-interest checking account since she was 14. She recently received a large sum of money from a settlement. I’m not sure how to report it on the FAFSA. We are co-owners and she is the primary, so should I split half and include it on her part and half on mine? If she has to report it all on her form, can I take half out and put it in my account or take her name off the account? Or would it be better to transfer the money into a college savings account, put some in a Roth IRA or buy a car with it before we file the FAFSA? I want to be ethical in my actions, but would like to reduce her expected contribution so she can get a loan and invest her money later legally.
— Mom

A. We appreciate that you’re trying to plan ahead.

Let’s go over a few things about the FAFSA form, which was revamped for 2024-25 with fewer questions.

It eliminated the Expected Family contribution (EFC) calculation, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.

“The Student Aid Index (SAI) no longer takes into consideration the number of family members enrolled in college and eliminates the allowance for state and federal taxes,” she said. “Additional changes include adjustments to the Income Protection Allowance (IPA) that shelters a certain amount of parental income — 20% increase for parents and 35% more for students — and a negative SAI is allowed.”

Mott said need-based aid will now be defined as:

Cost of Attending (COA) – Student Aid Index (SAI) – Other Financial Assistance = Financial Need

Mott said a joint account is usually reported based on who is receiving the 1099 and would be considered the primary account holder.

“You mention that your daughter is considered primary so the bank account would be considered hers and were there interest the 1099 would have come to her,” she said. “Student-owned assets are assessed at 20% while parent-owned assets are valued up to 5.64%.”

The FAFSA form does not have a look-back period when it comes to assets, Mott said. Income, however, is based on a tax return from two years prior.

“If the account is joint and half the assets are yours, you may consider dividing it so that each of you has your own share in an independent account,” she said.

If the account is an UTMA/UGMA custodial account, it can be turned over to your daughter at the age of majority, Mott said. For the FAFSA, this would be considered a parent asset similar to a 529 college savings account, she said.

As to your other questions, funding a 529 account is a wonderful way to grow savings for college in a tax-free account, Mott said.

“If the account is used to pay for qualified education expenses, there will be no taxes or penalties,” she said. “The account can not be owned by a minor, but anyone can contribute to it. The maximum amount that can be set aside in a New Jersey 529 is $305,000.”

Mott said it is important to note that 529 contributions are considered gifts and may need to be reported on a gift tax return if they exceed the $18,000 annual limit for 2024.

If the amount your daughter has received exceeds the annual gift limit, you may want to discuss the concept of “superfunding” with a five-year election, she said.

“But the answer to whether funding a 529, buying a car or funding a Roth IRA is an appropriate use of the funds is completely dependent on your and your daughter’s personal financial circumstances,” Mott said. “This best be addressed with a financial professional who can look at your complete picture and determine which, if any of these, may be appropriate and sensible financial decisions.”

Email your questions to .

This story was originally published in March 2024. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.