The financial aid formula looks at many factors, but assets and income are heavily weighted in the Expected Family Contribution (EFC). This month we will learn about the asset side of the formula. As we mentioned last month, there are many “puzzle pieces” for families to review. Even under the asset section, families often have many “puzzle pieces” to consider. In addition to type of assets, who owns the asset is critical in the financial aid formula.
CHILDREN’S ASSETS are weighted more heavily than parental assets. The colleges will use 20-25% of the value of these in the formula. Some assets are not included in the federal formula so make sure you know which of your child’s assets are counted and which can be excluded. Most assets owned by children are counted. Retirement accounts, cash value life insurance and annuities are excluded.
PARENTAL ASSETS are counted at 5.6% of the value each year. Again, there are excluded assets in the federal formula. Retirement funds, cash value life insurance, annuities, farms, home equity and businesses that meet specific criteria can be excluded. The Profile/Institutional formula does take some of these into consideration.
529 ACCOUNTS are considered the asset of the custodian. If the parent is the custodian and the child is the beneficiary, the asset is treated as a parental asset. If it is a UTMA/UGMA 529 it is still considered a parental asset. If the grandparent is the custodian, it is excluded from the federal formula but may be asked for in the Profile/Institutional formula.
When making decisions, please take into consideration any tax consequences, capital gains/losses, penalties, etc. It is often helpful to work with a professional who understands how the choices impact your financial aid qualification as well as your taxes. Sometimes it is beneficial to pay more taxes when it is potentially offset with a higher financial aid qualification. However, no decision should be made without fully understanding the long term consequences of your options. Tax professionals, stock brokers and financial planners are excellent in their specialty; however, they are often not trained in how their recommendations impact the financial aid formula and qualifying for aid at specific colleges. We at College Funding and Planning Consultants understand the broader picture of college expenses, financial aid, tax planning and retirement goals. If you would like a complimentary consultation to discuss your family’s situation, please click here.
RECENT SUCCESS STORY: Puzzle piece choices that reduced the FAFSA EFC by $17,000!
One family with three children had assets in their name and their children’s names –from a financial aid perspective that hurt them. The parents wanted the children’s money to be retained for the children. They were concerned about the increases in the market these last several years and feared a correction. They didn’t want to lose any of their children’s money. Yet, they were not happy with the little interest their bank was paying. In the end after researching the pros/cons of several options, they decided to reduce debt and add a cash value life insurance policy. They felt the whole life insurance policies were the safest option with the highest long-term appreciation. The big bonus is that option may also be excluded from the financial aid formula. With this family’s proper planning, their FAFSA EFC dropped by over $17,000/year!