If you are a high-income earner, earning at least $100,000 or more, or you have saved money and built a nest egg for your family, you may be curious about how to minimize its impact on your student’s financial aid package. When you fill out the FAFSA, it gives a snapshot of your financial situation as of the date it was completed. Before you fill out your form, you may want to consider several strategies to shelter your assets.
Transfer reportable assets into assets you don’t have to report. According to the FAFSA, you must report the following assets—
- Bank accounts
- Brokerage accounts
- Money market accounts CDs
- Stocks, bonds, mutual funds
- 529 colleges savings plans
- Real estate
- Trust funds
- Other investments
If you have any of these assets, your move would be to transfer it into an asset that you do not have to report. Examples of assets that you do not have to report on FAFSA includes:
- Retirement accounts (e.g. Roth IRA, Traditional IRA, 401K, 403b, SEP, Keogh, etc.)
- Small business ownership
- Home equity
For example, rather than saving money in your 529 plan for your student, you may consider opening a custodial Roth IRA account and saving there instead (but your child won’t touch it until they retire or make a first home purchase). There are many possibilities, that a simple spreadsheet could help solve.
But you should know how assets impact your financial aid. When you fill out FAFSA, you are provided with your Expected Family Contribution (EFC). EFC is the amount FAFSA says you can pay for college. The impact an asset will influence your EFC depends on who owns it, you, or your student. If your student holds an investment, it can increase your EFC by 20% on the FAFSA and 25% on the CSS/Profile. When you, as the parent, own an asset in your name, it increases your EFC by only 5.64% on the FAFSA and 5% on the CSS/Profile.
Other things to know about how assets will impact your EFC:
- With its simplified needs test, the FAFSA will disregard assets if the parent or student (must be independent) earn less than $50,000, is a dislocated worker, and other criteria, making the EFC automatically zero.
- Also, FAFSA has an asset protection allowance, which shelters a portion of parents’ assets based on the older parent’s age. The maximum amount is $9,400, and this phased out this year. The CSS/Profile has something similar for education and emergency savings.
If you do proceed to transfer any of your assets, be sure to speak to an accountant. For example, if there are capital gains, this will be reported on next year’s tax return and will impact your FAFSA two years from now.
You should also consider other strategies to shelter assets while getting ahead fiscally. These include:
- Using savings to pay down debt. If you have cash savings that exceed your credit card debt, you may want to use this to pay down the debt and boost your EFC.
- Invest in a large purchase, such as home improvement projects, a car, computers and other equipment for your college student.
- Ask relatives to hold off on any large gifts for birthdays or graduation.
- Avoid any 529 plans in the grandparent’s name. Once funds are withdrawn, it becomes income for your student which will have a big impact on the EFC.
- For existing 529 plans, transfer from parent to student, if allowed. If not, look into transferring between siblings, to the one not applying for college and financial aid.