Opening a Trump Account for Your Child? Assets Could Reduce College Aid Eligibility by 20%

The launch of Trump Accounts on 4th of July saw over 6 million American children sign up, with direct contributions and gifts of $50 million from family and friends into these new accounts. These data points were compiled by the US Treasury Department and Bank of New York Mellon, which is officially managing the initial Trump Accounts.

Trump Accounts include a $1,000 contribution from the Treasury for Americans born from 2025 through 2028. Contributions are made to the tax-deferred account, also known as a 530A account, which are meant for long-term retirement savings, instead of education expenses. However, funds can be withdrawn once the account holder reaches the age of 18 without penalty to pay for higher education.

However, experts believe that assets accumulating in a Trump Account could impact a student's need-based college aid eligibility. The Free Application for Federal Student Aid (FAFSA) uses the Student Aid Index calculation to estimate how much a family can afford to pay for college. During this calculation, FAFSA considers assets of both parents and the students, including funds in savings or investments accounts.

Here, student assets are generally prioritised because they are expected to contribute more for their own education.

Student-Aid Reduction by Up to 20%

Higher education expert Mark Kantrowitz recently told a media outlet that a Trump Account will be reported as a student asset on the FAFSA. If the assets are treated as an investment account, it could lower need-based student aid eligibility by 20% of the asset's value.

For instance, a $10,000 Trump account balance could mean up to $2,000 less in need-based grants. 'The government gives with one hand while taking back with the other,' Kantrowitz said.

Financial aid consultant Kalman Chany told CNBC that Trump Accounts could be subject to 'IRA-like rules once the growth period has ended... And currently, funds in IRAs and other retirement accounts are never considered to be assets that are required to be reported on the FAFSA.'

Note that when a Trump Account holder reaches age 18, the standard rules for traditional IRAs apply. Meanwhile, the US Department of Education is yet to provide official guidance on how Trump Accounts should be reported on the FAFSA.

However, Chany recommends signing up and taking any free money when it is offered.

'It will certainly make sense to claim the $1,000 initial seed deposit from Uncle Sam if the child meets the eligibility guidelines. In a worst case, one would not lose more aid than the value of the account funded by that seed money,' Chany added.

Students who plan use the Trump Account to pay for college could also face tax consequences. Withdrawn earnings are taxed as ordinary income, according to the US Treasury department.

Chany believes students can take the distribution from a Trump Account after 1st January of their sophomore year in college and not have that income factored into their aid calculation, arguing that financial aid determination is based on tax data from the 'prior-prior year' or a family's income from two years earlier. 'Take the distribution after you are out of the financial aid woods,' according to Chany.