Parents often have no idea which assets hurt their financial aid chances and which do not.
This is an especially relevant question because parents are now filing for financial aid for the 2017–2018 school year.
Here’s a quick rundown of what assets parents must share when completing the nation’s two main financial aid documents.
The biggest form is the Free Application for Federal Student Aid (FAFSA), which millions of parents complete every year to be eligible for federal and state aid, as well as in-house aid from the vast majority of public and private colleges.
The CSS/Financial Aid PROFILE, which is a creature of the College Board, is used by 229 schools, nearly all of them private, to determine who qualifies for their own institutional money. These schools only rely on the FAFSA to determine which of their students will qualify for state and federal aid.
Nonreportable FAFSA Assets
Many parents would be surprised to learn that the FASFA ignores a significant number of assets. Here are the main ones:
Equity in family home. The FAFSA isn’t interested in equity of the family home. In fact, the document doesn’t even ask if the filers own a primary home.
Retirement Assets. Your clients should not include qualified retirement assets on the FAFSA. You should emphasize this to clients because the instructions on the FAFSA are poorly written. Unfortunately, the FAFSA doesn’t specifically say DO NOT include retirement assets on the form.
Qualified retirement assets that clients shouldn’t share on the FAFSA include:
- Individual Retirement Accounts
- 401(k) accounts
- 403(b) accounts
- Roth IRAs
- Pension plans
Annuities and life insurance. Your clients should also never include any annuities on the FAFSA. It makes no difference if the annuities are inside a qualified retirement account, such as an IRA or 403(b), or not.
Parents should also not declare the cash value of any life insurance policies.
Household possessions. The value of cars, furnishings, jewelry and other household goods don’t belong on the FAFSA.
Family farm/small business. The value of a family farm is excluded if the family resides there and materially participates in the operations. The value of a small business is ignored if it has less than 100 full-time employees and the family owns more than 50 percent.
Reportable FAFSA Assets
The FAFSA does expect parents to share their nonretirement assets. Here is what to include:
Savings and Investments. Reportable assets in this category include:
- Checking and savings accounts
- Certificates of deposits
- Savings bonds
- Taxable brokerage accounts
- Vested stock options
Assets must be reported even if a parent withdraws money and puts it in a safety deposit box or stashes it somewhere else.
The value of these reportable assets should be based on the account balances at the time that the FAFSA is filed. It would be wise to print out account statements for verification.
Property. Parents must also declare the equity in a vacation home and investment properties. There isn’t a definitive source to determine a property’s value. Parents can use online sources such as Zillow, as well as recent neighborhood sale comps or appraisals.
College accounts. Assets in 529 college savings accounts and Coverdell Education Savings Accounts are reported as the parents’ assets.
Reportable and Nonreportable PROFILE Assets
The assets that the PROFILE ignores represent a much smaller list. Schools that use the PROFILE do not consider qualified retirement accounts in their aid calculations. They also don’t consider qualified annuities that are tucked inside an IRA, a 403(b) or other qualified retirement accounts. Your clients, however, must share assets that they have in nonqualified annuities.
Some PROFILE schools will also consider the cash value in life insurance policies as an asset.
Just like the FAFSA, PROFILE schools will want your clients to share their taxable assets, as well as college accounts. In addition, many PROFILE schools will use at least a portion of a family’s home to lower financial aid eligibility. The PROFILE also will assess the value of a family business or farm. Its formula, however, is proprietary.
Investments and Financial Aid Impact
Parents often overestimate the impact that their investments have on aid packages. Saving for college will provide families with more options.
The FAFSA assesses parent assets at up to 5.64 percent and the PROFILE assesses these assets at up to 5 percent. Every $10,000 that a parent accumulates will reduce eligibility for financial aid at no more than $564.
A student’s assets are treated more harshly for aid considerations.
A child’s assets would include money in checking/savings accounts that they possess, as well as UTMA/UGMA accounts. Assets in a trust that designates a child as a beneficiary would also be counted even if the child has no current ability to tap into the money.
The FAFSA assesses a child’s assets at up to 20 percent and the PROFILE assesses these assets at up to 25 percent.