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The Myth of Asset Sheltering and Financial Aid

Contrary to many parents’ belief, assets will not jeopardize their children’s chances for financial aid for the vast majority of families.

Many parents with college-bound kids believe that hiding assets is the best way to boost their chances for financial aid. But it isn’t.

In fact, the major factors that impact financial aid awards include: 

  • Parental income
  • Number of children in college simultaneously
  • Parents’ marital status
  • Generosity of the colleges a child is applying to

While some types of assets will count in financial aid calculations, many won’t. For the vast majority of families, assets will not jeopardize their chances for financial aid.

This misconception regarding assets leads to resentment among conscientious savers who believe that their account balances will hurt them while less responsible families will benefit. But parents who have saved for college are going to be in a superior position compared to those who haven’t.  

One reason why assets don’t hurt financial aid for most households is because the aid formulas shelter significant asset sources. For one, aid formulas don’t consider qualified retirement accounts. This is welcome news since most parents have the majority of their money invested in qualified retirement accounts that include: 

  • Traditional Individual Retirement Account
  • Roth IRA
  • SEP IRA
  • SIMPLE IRA
  • 401(k)
  • 403(b)
  • 457s
  • KEOGH

Parents could have $1 million in their retirement accounts, and that money wouldn’t hurt the applicant’s eligibility for need-based aid.

The aid formulas that I’m referring to belong to the Free Application for Federal Student Aid and the College Board’s College Scholarship Service Profile. The vast majority of colleges, including more than 99 percent of public universities in this country, only use the FAFSA. Slightly more than 200 colleges (nearly all private) also use the CSS Profile to determine what students would qualify for their own institutional money. The CSS Profile schools include the elite private institutions, such as the Ivy League schools, which primarily educate wealthy students.

Yet another major asset that FAFSA-only colleges and universities ignore is the equity in a primary home. Your clients could own a residence outright in such places as Palo Alto, Calif., Greenwich, Conn., Aspen, Colo. and New York, N.Y. and the equity wouldn’t impact financial aid either. 

Many CSS Profile schools, however, do consider home equity, but some of these schools limit the impact by linking the equity to the household income.

What the FAFSA and CSS Profile formulas do care about are assets outside of retirement accounts. Among the assets that are assessed for financial-aid purposes are:

  • Taxable brokerage accounts
  • Savings and checking accounts
  • Certificates of deposit
  • 529 plans and Coverdell’s
  • Equity in investment properties
  • Trust accounts
  • Custodial accounts

The FAFSA assesses parental assets at up to 5.64 percent, while the CSS Profile assesses them at up to 5 percent. Put another way, for every $10,000 that parents have in college accounts or other nonretirement assets, the eligibility for financial aid drops by just $564. 

The financial aid hit for nonretirement assets, however, is even less than that because both the FAFSA and the CSS Profile formulas automatically shelter some of these relevant assets. For instance, married parents, who are both 50 years of age will automatically have $22,300 sheltered in 529 assets or other nonretirement money from the FAFSA’s aid calculation. You can find the chart with these numbers for parents of any age in a federal document called the 2018-2019 Expected Family Contribution.

The CSS Profile’s asset-shelter formula is proprietary, but it’s considered a more generous one than the FAFSA.

Here’s an example of how little assets can impact aid. Let’s assume that the oldest parent’s age by Dec. 31 is 50. (The formula only cares about the oldest parent’s age.) The married couple has saved $100,000 for college. With the asset protection, the eligibility for financial aid purposes would only drop by $4,382.

Surely, your clients would rather have $100,000 saved for college than have nothing except the possibility of getting $4,382 in need-based aid. And this aid is likely to be in the form of loans. 

What about parents who do have considerable assets?

Typically, when a family has considerable assets they also have a high income. Even without the assets, parental income can eliminate the possibility for financial aid. In these cases, affluent families, who don’t want to pay full price, should look for schools that give merit scholarships to wealthy students. The vast majority of private and public colleges do just that.

Some professionals who focus on college planning seem to believe that parents should hide their assets in annuities and life insurance to qualify for financial aid. These are often expensive options and are usually unnecessary.

The schools that use the FAFSA do not assess money in any type of annuities nor the cash value of life insurance. However, nearly all the colleges that provide excellent need-based aid use the CSS Profile. These CSS Profile schools count any assets that are in nonqualified annuities and some of these institutions also assess the cash value of life insurance policies. Consequently, hiding your assets could be costly and ineffective.

In addition, many colleges don’t provide good need-based aid. So even if parents went to the trouble of tying up their money in products that they don’t need, they could end up without a better package. And they risk not having liquid assets to pay for college.

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