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Questions about Assets and the Free Application for Federal Student Aid (FAFSA)

Mark Kantrowitz

November 03, 2009

There are many college financial planners in my area who claim to be able to help us “legally and ethically” reposition our assets to lower our expected family contribution (EFC) and save us thousands of dollars per year in college costs. Are there really such secrets out there that will help us that much? — Larry C.

Less than 4% of dependent students have any contribution from parent assets. Since the EFC is much more heavily weighted toward income that assets, shifting assets is unlikely to have much of an impact on aid eligibility with one exception. Assets in the child’s name are assessed at a 20% rate while assets in the parent’s name are assessed at a maximum rate of 5.64%. Assets in the parent’s name are also partially sheltered by an asset protection allowance. So moving assets out of the child’s name may significantly improve aid eligibility. The simplest way to do this is sell the child’s assets and use the cash proceeds to fund a custodial 529 college savings plan, ideally at least two tax years prior to enrollment. Federal law treats such a custodial 529 plan as though it were a parent asset. Another good tip is to use financial assets to pay down consumer debt, since the assets might count against you while the debt doesn’t help. Plus, paying off high interest debt with money that is earning a paltry return on investment will save you money. However, before you start manipulating your family’s assets, use an EFC calculator to play what-if games to evaluate the impact on aid eligibility. There’s no point in moving the assets if it doesn’t affect aid eligibility.

There’s also no reason to pay for this sort of advice, since it is available for free on the FinAid site. See Maximizing Your Aid Eligibility for additional tips.

I’m 19 years old and am going off to college in next fall. Will the insurance money my mother received this year from my father’s death be counted against me on the FAFSA, leaving me with less aid? — Christopher B.

Insurance proceeds count as income on the FAFSA in the year received. They also count as assets. After you submit the FAFSA you should ask the college for a professional judgment review. Most colleges will adjust the FAFSA to stop the insurance proceeds from being counted as untaxed income, but will retain it as an asset. After all, life insurance proceeds are a one-time event that is not reflective of income during the award year. The college may also make an adjustment to income to exclude your father’s income for similar reasons. If your mother has any unusual expenses, such as unreimbursed expenses associated with a disability or medical condition, she should tell the college about them.

Note that if your mother’s income is less than $50,000 and she is eligible to file a 1040A or 1040EZ or meets certain other criteria, the federal need analysis methodology will ignore her assets. Otherwise she should consider whether to use the life insurance proceeds to pay down debt such as a mortgage, auto loan and credit card bills. Consumer debt is not considered by need analysis formulas, while financial assets are counted against you. Assets are reported as of the date you submit the FAFSA.

When applying for financial aid, do cash assets prevent you from obtaining aid? — Tammy T.

Financial assets, whether in a bank, brokerage or college savings plan account or stuffed in a mattress, must be reported on the FAFSA.

The impact of these assets on eligibility for financial aid depends on whether they are treated as student or parent assets. If a 529 college savings plan, prepaid tuition plan or Coverdell Education Savings Account is owned by a dependent student it is treated as a parent asset. If it is owned by an independent student it is treated as a student asset. If it is owned by a parent it is treated as a parent asset. If it is owned by a grandparent it is not reported on the FAFSA. However, if a 529 plan is not reported as an asset on the FAFSA, qualified distributions from the plan will be reported as untaxed income to the beneficiary on the subsequent year’s FAFSA.

Student assets are assessed at a much higher rate than parent assets. Money in a qualified retirement plan (401(k), 403(b), IRA, Keogh, etc.) is disregarded, as is the net worth of the family home and any small businesses owned and controlled by the family. A portion of parent assets are sheltered by an asset protection allowance which is based on the age of the older parent. For most parents of college-age children (median age 48) this protects about $50,000 of parent assets. Then any excess assets are assessed according to a bracketed scale, with a top bracket of 5.64%. Student assets, on the other hand, are assessed at a flat rate of 20% with no asset protection allowance.

Low income families may have their assets disregarded entirely if they qualify for the simplified needs test. The simplified needs test disregards all family assets if the parents income (for a dependent student) or student and spouse income (for an independent student) is less than $50,000 and they satisfy certain other criteria, such as being eligible to file an IRS Form 1040A or 1040EZ instead of an IRS Form 1040 or a member of the household qualifies for certain federal means-tested benefit programs or is a dislocated worker.


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