How Parent & Child Assets Impact Financial Aid Packages

May 10, 2017
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Parents with investments and home equity generally find it harder to get financial aid for their college-bound children. But if you understand how assets are assessed on the FAFSA and CSS Financial Aid PROFILE, you can improve your chances for getting the best financial aid package possible. Do you know how your investments might reduce your chances for financial aid?  And what about the role that your family’s home equity plays in determining whether your child will receive financial help from a college?

When their children are little, parents often feel virtuous about saving for college, but when the college years are approaching, they often begin to view their college accounts and other investments as if they were time bombs with short fuses. Parents frequently assume that their assets will wreck their chances for financial aid. But parental fears about their investments are usually worse than the reality behind the role that assets play in their financial aid determinations.

Assets and financial aid applications

Whether your assets will hurt your financial aid prospects depends in part on what financial aid application(s) each school uses. There are the two main applications:

The free application for Federal Student Aid (FAFSA). All colleges and universities use the Free Application for Federal Student Aid (FAFSA) to determine if a student qualifies for federal and/or state financial aid. Most schools also use FAFSA to decide if a student qualifies for financial help from their own institutions. Nearly all public institutions and many private colleges find it sufficient to rely solely on the FAFSA.

CSS/Financial Aid PROFILE. Roughly 260 colleges and universities (nearly all of them private) require families seeking financial aid to complete an additional aid application called the CSS/Financial Aid PROFILE. Highly selective schools, such as the Ivy League, Stanford, MIT, and Amherst, use the PROFILE.

How FAFSA treats assets

Let’s first take a look at how assets fare under the FAFSA aid calculations. Many families will be pleasantly surprised that with the FAFSA, their investments make little or no impact on their children’s chances for need-based help. That’s because FAFSA ignores some assets, including the two biggest for many families: home equity and qualified retirement accounts.

Here are the assets that FAFSA ignores and parents do not need to include in their application:

  • Equity in a primary home
  • Qualified retirement assets, including: Traditional and rollover IRAs
  • Roth IRAs
  • SEP-IRAs
  • 401(k), 403(b), 457(b)
  • SIMPLE
  • KEOGH
  • Pension plans
  • Annuities (qualified and nonqualified)
  • Cash value in life insurance

While retirement accounts are safe, other assets are not. The following are those assets FAFSA does assess in determining eligibility for financial aid: All taxable accounts including:

  • Certificates of deposit
  • Savings and checking accounts
  • Commodities
  • Equity in property other than primary residence
  • College Accounts 529 college plans
  • Coverdell Education Savings Accounts
  • UGMA/UTMA custodial accounts (considered children’s assets)
  • Stocks
  • Bonds
  • Mutual Funds

How parents’ vs. children’s assets are assessed

The FAFSA formula assesses relevant parent assets at a maximum of 5.64%. The federal formula assesses child assets, which would include all custodial accounts as well as a child’s own savings/ checking, at 20%. The federal formula treats child assets more harshly because students are expected to contribute more of their money to pay for their college years.  For financial aid purposes, it could possibly be better to have money held in the parents’ names rather than the child’s. However, the child assets shouldn’t pose a problem if a family isn’t going to qualify for need-based aid because of high parental assets and income. It’s also always important to look for schools that provide merit scholarships for high-income students—and luckily most do.

At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

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