Starting October 1st of a student’s senior year of high school, parents are able to start filling out the FAFSA (Free Application for Federal Student Aid) form that will evaluate the student and family’s financial condition to determine eligibility for college financial aid. Both assets and income are considered to calculate a family’s EFC (Expected Family Contribution) to college expenses. Financial aid is then typically awarded in the form of grants, scholarships and loans (click here to read more on the types of financial aid awarded). The student’s freshman year of college is the base year for which these award packages are constructed so it is important to understand how assets and income are counted on the FAFSA form in order to maximize a student’s financial aid offering.
Parent Owned Assets and Income
Parent owned assets are counted at 5.64% towards a family’s EFC. Retirement accounts such as 401(k)s, 403(b)s, Traditional IRAs and Roth IRAs are not included on the FAFSA form, but non-retirement accounts and liquid accounts, including brokerage accounts, and 529 Plans are included. The value of family businesses may also be considered, as well as the equity in a vacation home. However, equity in a primary residence is excluded. In addition to assets, 22%-47% of parent income can be counted in calculating EFC. When considering income, figures from the parent’s “prior-prior” tax return are used. Therefore, a parent with a college freshman in October of 2018 would be filing the FAFSA form as early as October of 2017 but using 2016 tax return information.
Student Owned Assets and Income
Student owned assets are included at a rate of 20% and income is counted at 50%. Custodial accounts as well as student checking and bank accounts are included as a student asset whereas interest, dividends, and capital gains reported on a student’s tax return are counted as income. The student’s prior-prior tax return is used in the same way it is used for the parents in calculating EFC.
Grandparent Owned Assets
Grandparents commonly put aside funds for their grandkid’s education in the form of a 529 Plan. A grandparent-owned 529 Plan is not counted as an asset on the FAFSA form. However, once distributions are made, they are considered a gift to the grandchild and included as student income at the 50% rate on the FAFSA form. Because student income is counted at a higher rate than parent assets or income, it may make sense to transfer a grandparent 529 Plan to the parent’s ownership prior to the student’s freshman year, or wait until junior or senior year of college to distribute the funds.
The higher a family’s EFC, the lower the amount of needs-based financial aid that is likely to be offered. Financial aid is also first come, first serve so apply early. Call Sharkey, Howes & Javer at 303.639.5100 to speak with a CERTIFIED FINANCIAL PLANNER™ and discuss the opportunities for proactive planning when determining who should help with saving for college and how the accounts should be titled and used.