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.
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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
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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
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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
— 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
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.