FAFSA: Understanding Parent and Student Assets
With FAFSA filing season well under way, millions of students and parents around the country are working to get this important document filed.
Because the FAFSA requires detailed tax and asset information the process can be intimidating and frustrating. Nothing hurts like spending an hour filing the FAFSA to be told the only financial aid available for you is the Stafford loan. Don’t let the frustration get to you!
One area that leaves FAFSA filers flummoxed is valuation of assets held by the parents and students. What you don’t know may cost you. Here are some key points you need to know.
What assets is the FAFSA looking for?
Savings and checking account balances, investment accounts, pension plans, tax-exempt interest income, tax credits, investment property, tax-deferred savings plans such as the 529, the net worth of a business with over 100 full-time employees or a farm that is not the family’s primary residence.
What value will the FAFSA associate with my asset?
All assets listed under the child are weighed at 20% of their value when calculating the expected family contribution (EFC)
All Assets listed under the parent name is weighed at 5.64% of their value when calculating the EFC
With valuations like this, it pays to make sure assets are allocated correctly. With assets in the child’s name being weighed most heavily, one should avoid putting any cash assets in the student’s name prior to filing the FAFSA.
1. The student should keep no cash or cash equivalents saved in their name: Students are punished by the FAFSA for saving any cash. The FAFSA will specifically ask “As of today what is the cash balance of checking, savings…” accounts for the student. Because the question is phrased “As of today” it leaves room for interpretation. If all money were pulled from checking and
savings the day the FAFSA were filed, then the answer would be zero. A nominal value of $200 or $300 may be listed, but the reality is that there is no good reason to include anymore cash assets than that because no one else in their right mind does. Cash assets sink financial aid eligibility, but are virtually untraceable unless admitted to on the FAFSA.
2. Declared cash assets should be in the parents name: Certain cash assets are simply too large to be avoided. In such cases, the assets should remain in the parents name to minimize the percentage weight. Do not give any of it to the kid as a “gift”.
3. For divorced parents: Because only the custodial parent assets are weighed on the FAFSA, do not include the other parent information. The custodial parent officially cares for the student for the majority of the prior 12 months, and usually claims the child as a dependent. College planning in divorce situations dictates that the parent with lower income should be custodian to the student to ensure maximum financial aid eligibility.
4. My great uncle Harold wants to give me college money!: First of all thank Great Uncle Harold for helping you out! However this could reduce eligibility for financial aid if not handled correctly. If Uncle Howard gives the money directly to the kids, it should be counted as a cash asset in the students name and will be weighed heavily against financial aid eligibility. If the money is given to the parent, it is weighed at a lower percentage but still must be calculated as a cash asset. The smart move is to tell Uncle Howard to hold the cash in his hands until a tuition payment is due, then assist the student with costs as they are incurred. The cash would not be declared a student asset in their checking account in this scenario. The other way to handle this would be if Uncle Harold funded a 529 plan for the children about to attend college. 529 assets are assessed at a much lower value than cash in checking or savings.
5. To work or not to work: Students with parents earning low income have little incentive to work themselves when faced with financial aid eligibility. Again, this is because any money in the student’s name is weighed heavily against financial aid eligibility. I have seen students from disadvantaged backgrounds reduce their financial aid eligibility because they earned income on their own. The FAFSA says that any earnings are supposed to be included as part of income no matter how they are earned. However, there are many students that get jobs to earn cash and never admit to the income on FAFSA because it is untraceable. This is unfair but it happens all the time. If given the option to work before college, recognize that any cash earnings are invisible unless you admit to them on the FAFSA. If you receive a W-2 and have to file a tax return as a result of a job, the earnings are easily traceable if selected for financial aid verification.
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