My daughter is a high school junior. I have just refinanced with
cash out for a home remodel to accommodate my aging parents. However
the remodel is delayed and the money is still in our account. The
remodel should be completed and the money spent by the time my
daughter starts her senior year. Will this money be counted as asset
for financial aid? We have heard that a snapshot of assets at year end
of the junior year is taken into consideration. We may be able to move
money around but we don't want to make the matter worse. What do you
— Lynn H.
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Money in a bank or brokerage account counts as an asset on the Free
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Application for Federal Student Aid (FAFSA), regardless of the source
or intended purpose of the funds.
The only exception is when the money is pledged as collateral for a
loan. For example, a margin loan in a brokerage account reduces the
net worth of the account. Technically, the loan is treated as reducing
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the value of the stocks and bonds in the account, not the cash
proceeds of the loan, since the investments are pledged as security on
the margin loan. So the cash still counts as an asset.
The FAFSA requires the applicant to report the net worth of the
applicant's assets. This is the market value of the assets minus any
outstanding debt secured by the assets. The margin loan reduces the
net worth of the stocks and bonds in the brokerage account.
With a cash-out refinance, the mortgage is secured by the real estate,
not the cash proceeds of the loan. Thus the debt will be treated as
reducing the net worth of the real estate on the FAFSA. The cash is a
separate asset and is reported on the FAFSA.
(Note that the net worth of the family's principal place of residence
— the family home — is not reported as an asset on the
FAFSA. The net worth of investment real estate, such as a second home
or a rental property, however, is reported as an asset on the FAFSA.)
The logic of this treatment is that cash in the bank is fungible and
can be used for any purpose, including paying for a child's college
education. The intention to use the money for another purpose, such as
remodeling a home or paying for retirement, does not guarantee that
it will be used for that purpose. Only when the money is
restricted for particular purposes, such as a qualified retirement
plan, does the FAFSA ignore it as an asset. (There are exceptions for
the family home and family business because Congress did not want to
force families to sell their homes and businesses to pay for college.)
The net worth is reported based on a snapshot of the market value of
the asset and the outstanding debt as of the date the FAFSA is filed,
not the end of the junior year. The FAFSA is first filed soon after
October 1 of the senior year in high school. If the money in the bank
is spent on the remodel before the FAFSA is filed, the money will have
no impact on eligibility for need-based financial aid.
If the money will still be unspent on the date the FAFSA is filed, it
must be reported as an asset on the FAFSA. Moving the money around
will generally not yield a more favorable financial treatment and
still allow the family to use the money for remodeling the home.
Instead, the family should consider appealing to the college financial
aid administrator for a professional judgment review. The family
should provide the financial aid administrator with copies of
documentation that demonstrate the purpose for the funds, such as a
signed contract for remodeling the home and restrictions in the
promissory note requiring the family to use the proceeds to improve
the home. It also helps if the money is in a dedicated account, such
as an escrow account, and not commingled with the rest of the family
If the college financial aid administrator does not make an adjustment
to exclude the funds, the money will be treated as a parent asset on
the FAFSA. This has a relatively small impact on eligibility for
need-based aid. In a worst-case scenario, every additional $100,000 in
parent assets will reduce need-based aid eligibility by $5,640.