Free FAFSA Guide
When you file your Free Application for Federal Student Aid (FAFSA®) (and some other financial aid forms, like the CSS Profile™), you’ll have to answer a series of questions about both your income and your financial assets. (If you’re a dependent student, you’ll also be asked about your parents’ income and assets.)
In most cases, income and assets both play a role in determining your eligibility for financial aid — especially need-based aid.
The first thing to understand is that when it comes to the FAFSA, some types of assets have to be reported — and others don’t.
Note: Some students and parents aren’t even required to answer the questions about assets. You’ll get a pass if you are below the income threshold for the year and file certain types of tax returns. Certain states, like California, do require you to answer questions about assets to determine eligibility for state aid, even if you aren’t required to answer those questions for federal aid purposes.
Note: Some of these assets do have to be reported on the CSS Profile™, including the net worth of the family home, the family farm, and small businesses owned by the student or parents.
These questions ask about the “net worth” of assets. This is the value of the asset minus anything you owe on the asset (technically, the debts secured by the asset).
Which assets do I need to report?
Assets held by others, such as a grandparent, aunt, uncle, cousin or sibling, are not reported on the FAFSA, but may be reported on the CSS Profile.
However, money in 529 college savings plans, prepaid tuition plans, and Coverdell education savings accounts owned by a parent must be reported as a parent asset on the FAFSA, even if the beneficiary is a sibling.
Contributions to and distributions from a non-reportable asset (such as a grandparent owned 529 plan), however, are reported as income (taxable or untaxed) on the FAFSA, if you, your parents or your spouse are the source of the contributions or the recipient of the distributions.
Before even thinking about whether you should spend the time to strategize, you may want to do a quick check of your family finances.
The FAFSA gives a parental asset protection allowance up to $9,500 (if there is only one parent), and up to $18,900 (if there are two parents). The amount of parental asset protection allowance will be determined based on the age of the oldest parent. Anything above the determined asset protection allowance threshold, is assessed at 12% of the net value of the parental assets that count toward your EFC.
Don’t forget to look at your own finances. While you may not have as much in your savings account, student assets are weighted more heavily (20% for the FAFSA), so these must be reported, too.
Shifting assets from reportable assets to non-reportable assets can impact your eligibility for financial aid. These are some strategies to consider. Everyone’s financial situation will vary, and these considerations may not make financial sense for you.
An important thing to keep in mind. Families with enough assets to affect the student’s eligibility of need-based aid, will likely have enough income to affect the student’s eligibility for need-based aid before assets are even considered.
While these seem like good ideas on paper, there are a few issues associated with shifting assets.
The CSS Profile has different asset reporting requirements than the FAFSA. If you are applying (or attending) a school that requires the submission of the CSS Profile for financial aid awards, you will need to provide the required information. Certain assets that are non-reportable on the FAFSA are reportable on the CSS Profile. Examples include small businesses owned and controlled by the family, the family home, and a family farm. All college savings plans which name you as a beneficiary are reported as assets on the CSS Profile, even if the accounts are owned by someone other than you or your parents.
Investments in some non-reportable assets must be made in cash, requiring the sale of the investments before shifting the funds into a non-reportable asset. This may result in capital gains, which might be reportable as income on the FAFSA and CSS Profile, depending on the timing.
Income and distributions from a non-reportable asset are reported as taxable or untaxed income on the FAFSA and CSS Profile.
For example, grandparent-owned 529 plans are not reported as an asset on the FAFSA, but any distributions from a grandparent-owned 529 plan will be reported as untaxed income to the beneficiary (you, the student) on next year’s FAFSA. This can have an impact on eligibility for need-based aid, as student taxable and untaxable income can reduce aid by up to half of the amount of the distribution.
You can wait until your senior year in college to take a distribution (assuming that you will not be enrolling in graduate or professional school) and changing the account owner to your or your parents. (Distributions from a college savings plan you or your parents own are ignored on the FAFSA. Such college savings plans are reported as parent assets on the FAFSA, but the reduction in aid eligibility is minimal.)
Before paying down debt, you (and/or your parents) should save 6-9 months of salary in an emergency fund. The emergency fund might be used to cover living expenses if you or your parents lose your jobs or to cover other unforeseen expenses, such as home and car repairs and/or medical expenses.
Another way to shift the asset load is to accelerate necessary expenses. For example, if your family needs a new car or the house needs a new roof or other major repairs, it may be better to spend the money on these necessary expenses before filing the FAFSA or CSS Profile.
Similarly, if you need a SAT or ACT test prep class, a dorm refrigerator and microwave oven, a computer for school, or a car to commute to college, pay for it (with your money) before filing. (You may be able to qualify for a discount on computer equipment once you enroll in college.)
Cars, computers, furniture, books, boats, appliances, clothing, and other personal property are not reported as assets on the FAFSA. Home maintenance expenses are also not reported as assets on the FAFSA, since the net worth of the family’s principal place of residence is not reported as an asset.
If your parents are planning on buying these items anyway, accelerating their purchase may reduce reportable assets, which would decrease the expected family contribution (EFC).
Your family can also reduce reportable assets by making a charitable contribution.
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