Eligible Expenses:
An ESA owner may take a tax-free distribution on behalf of the beneficiary for “qualified” educational expenses. These expenses can be for elementary and secondary education (grades K-12), in addition to college and graduate school. The IRS has fairly liberal standards about what may be claimed as an educational expense, including:- Tuition, Room, and Board
- Computers and Laptops (even if not required by the school)
- Books and Supplies
- Tutoring
- Transportation
Effect on Federal Financial Aid Eligibility:
Coverdell ESA’s may affect financial aid significantly, or not at all, depending on who the “owner” of the account is. By definition, the owner is usually the person who sets up the account, and usually not the person who is eventually going to college (the “designated beneficiary”).If the child is both the owner and the designated beneficiary, and is still considered a dependent of the parents, none of the assets are counted against financial aid. (Note: this is a legislative loophole that Congress may close in the near future, making the Coverdell ESA assets of the parents).
If the child is both the owner and the designated beneficiary and is considered independent of the parents, 20% (this dropped from 35% in 2007) of the assets are counted against financial aid.
If the owner is a parent, then 5.64% of the assets are counted against financial aid.
If the owner is a grandparent, member of extended family, or unrelated individual, it is argued (but hasn’t been tested by a court), that the assets do not count against financial aid at all. This is due to the fact that there is no place to report assets owned by people other than a parent or student on the FAFSA form.
