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How Can One Shelter Parent Assets on the FAFSA?

Mark Kantrowitz

December 03, 2012

My daughter is going to college next year. We have to file the FAFSA in January. We have money in our savings account that we saved for emergency reasons and some for my daughter’s college. Will this affect her chance in getting grants or loans? What should we do? — G.N.

Money in a savings account counts as an asset on the Free Application for Federal Student Aid (FAFSA) and may affect eligibility for need-based student financial aid.

Most personal finance experts recommend keeping 3 to 6 months salary in an emergency or rainy day fund. The size of the emergency fund is based on the average duration of unemployment. During the current economic downturn, some people recommended increasing the size of the emergency fund to 6 to 12 months salary.

The FAFSA does not have an exclusion for money in an emergency fund. This is in contrast with the CSS Financial Aid PROFILE Form, which subtracts an allowance for emergency reserves from assets. The PROFILE is a supplemental form used by about 250 mostly private colleges for awarding their own institutional aid funds. This is one of the few areas in which an institutional need analysis formula may yield a lower expected family contribution than the federal need analysis methodology.

Despite the lack of an exclusion for emergency funds on the FAFSA, the impact of parent assets on the student’s eligibility for need-based aid is often small. If the parents qualify for the simplified needs test, all assets will be disregarded on the FAFSA. To be eligible for the simplified needs test, the parents’ adjusted gross income must be less than $50,000 and the parents must have been eligible to file an IRS Form 1040A or 1040EZ. (There are other ways of qualifying for the simplified needs test, such as by qualifying for certain means-tested federal benefit programs.) Even if the family does not qualify for the simplified needs test, the FAFSA ignores the net worth of the family’s principal place of residence, the value of any small businesses owned and controlled by the family, and assets in qualified retirement plan accounts. There is also an asset protection allowance based on the age of the older parent that shelters about $40,000 to $50,000 of parent assets for most parents. (The asset protection allowance is based on the present cost of an annuity which would, at retirement, supplement Social Security benefit payments to a moderate living standard. The asset protection allowance can vary significantly from one year to the next based on changes in the Consumer Price Index.) Any remaining reportable parent assets are assessed according to a bracketed scale, with a top bracket of 5.64 percent.


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