Trump Accounts may reduce college aid eligibility for families

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Trump Accounts and college aid

Highlights

If Trump Account assets are treated as student-owned, FAFSA could reduce need-based aid by 20% of account value, potentially $2,000 per $10,000 saved.
A $1,000 Treasury pilot contribution to Trump Accounts for babies born 2025–2028 may lower college aid eligibility even for families that make no additional deposits.
Withdrawn Trump Account earnings are taxed as ordinary income, potentially impacting FAFSA calculations more than 529 plans, whose withdrawals are tax-free and counted less heavily.

FAFSA treatment remains uncertain

As reported by CNBC, the main question for families is whether money held in a Trump Account will be counted as a student asset or treated more like a retirement account under federal financial aid rules.

The accounts, also known as 530A accounts, are designed for long-term tax-deferred saving, but funds can be withdrawn at age 18 without penalty for higher education costs. The FAFSA uses the Student Aid Index to estimate how much a household can pay for college, factoring in income as well as assets held by parents and students.

Higher education expert Mark Kantrowitz says a Trump Account will be reported as a student asset on the FAFSA. If it is treated as an investment account, that could reduce need-based aid eligibility by 20% of the asset value, meaning a $10,000 balance could cut grant eligibility by as much as $2,000.

Because the U.S. Treasury Department provides a one-time $1,000 pilot contribution for babies born from 2025 through 2028, even families that add no extra money may still see some effect on aid eligibility. Kalman Chany, a financial aid consultant and author of the Princeton Review's "Paying for College," says the accounts could instead fall under IRA-like treatment after the growth period ends, which would make them more favorable because retirement assets are not currently reported on the FAFSA. Official guidance from the Department of Education is still pending.

Tax timing and comparison with 529 plans

Families that plan to use Trump Account money for college also need to consider the tax impact of withdrawals and the effect of student income on future aid calculations.

According to Treasury guidance cited in the text, withdrawn earnings are taxed as ordinary income. Student income above the FAFSA protection threshold can be assessed at up to 50%, which means the timing of a distribution matters. Chany says students may limit the effect on future aid by taking distributions after Jan. 1 of their sophomore year in college, because FAFSA uses tax data from the prior-prior year.

Parent-owned 529 college savings plans still receive more favorable aid treatment than student-owned assets. Under FAFSA rules, up to 5.64% of parental assets are counted, compared with 20% for student assets, and qualified 529 withdrawals are tax-free, while Trump Account distributions may remain partially taxable because they can include both pretax and after-tax contributions.

Our earlier article on the U.S. student-loan repayment overhaul explained how the July 1 changes, following the end of the SAVE plan, are expected to raise monthly bills for many borrowers. We noted that households are adjusting by cutting discretionary spending, delaying retirement and homebuying plans, and taking on extra work, while delinquency and default risks remain elevated according to Federal Student Aid data.

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