Surprisingly, at the most expensive colleges, now charging $65,000 per year, students may qualify for a significant amount of financial aid even if their parents earn over $175,000 per year and have substantial assets. And if those assets are structured favorably, more of a college’s own institutional (not taxpayer funded) aid dollars may come your way.
For example, you don’t have to list a $2 million family-owned small business when applying for college aid on the FAFSA, but you do on the CSS Profile. Your home equity will count on the CSS Profile, but not the FAFSA. If your child owns a 529 college savings account, it will be treated way more favorably on the FAFSA than the Profile. Assets in retirement plans don’t count, but last year’s retirement contributions do. They get added back to your income for aid calculation purposes.
With so many questions and such confusion, you can be doing your best to save for college and retirement and inadvertently hurt your child’s eligibility for college aid, raising your out-of-pocket cost and depleting more of your hard-earned income and assets.
Calculate ahead of time how your assets will affect your child’s college aid eligibility, and your ability to pay for college.
That’s why it is so important for you to discover ahead of time how your savings, investments, retirement accounts and 529 college plans may hurt your child’s aid eligibility when you complete the FAFSA and CSS Profile college aid forms. You specifically want to determine three things as early as possible:
1) Which colleges use which aid forms and formulas.
2) How your family’s finances will be assessed under each formula and, therefore, at each college.
3) Will your income throw your child out of the running for need-based aid regardless of what type of accounts your assets are in, or who own them, you or your child.
Thanks But No Thanks: While friends, family and coworkers have good intentions, they are usually the worst source of financial aid advice. Your planning needs to be based on your family’s unique situation only!
Two College Aid Forms: The FAFSA And CSS Profile
The process of applying for need-based financial aid for college begins by students and parents completing one or two financial aid forms, theFAFSA (Free Application for Federal Student Aid) and/or the CSS Profile. Any college or university that awards federal student aid must require that students complete the FAFSA in order to determine eligibility for federal aid (it works for most state aid too). Most colleges and universities nationwide use the FAFSA as their sole application for need-based financial aid. Students applying for aid at those colleges only need to complete the FAFSA. However, there are about 300 colleges which require that the CSS Profile be completed in addition to the FAFSA. Those colleges use the CSS profile to assess the student’s eligibility for the their own institutional aid dollars.
Typically, “Profile” colleges are very selective private colleges, including the Ivies, but the University of Michigan at Ann Arbor, Georgia Institute of Technology and the University of North Carolina at Chapel Hill are examples of flagship state universities that require the Profile, not just the FAFSA.
There is also a group of 26 colleges that make up what is known as the 568 Presidents’ Group, which was formed by the presidents of those institutions for the purpose of assessing students’ ability to pay for college using a “consensus” methodology. The 568 Presidents’ Group schools also require students to complete the CSS Profile, but they treat students’ assets and parents’ home equity different (more favorable to families) than the institutional methodology does. Thus, there are two financial aid forms but three methodologies of calculating a student’s expected family contribution (EFC).
Three College Aid Formulas
Need-based aid eligibility is based on the formula (Cost of attendance – Expected Family Contribution (EFC) = Need). Expected family contribution (EFC) is the minimum amount the family is expected to contribute toward the cost of college, and is calculated using three different methods: Federal Methodology (FM), Institutional Methodology (IM) and Consensus Methodology (CM). All three EFC calculations are based on the income and assets of the parents and student as reported on the two financial aid forms, the FAFSA (FM) and the CSS Profile (IM and CM).
Which Assets Count
Retirement assets such as 401k, 403b, IRAs, SEP, SIMPLE, Keogh, profit sharing, pensions and Roth IRAs are not included in the calculation of EFC under any of the three EFC methodologies. Assets that aren’t in retirement accounts — balances in checking, savings, CDs, brokerage accounts, money market, investment real estate, stocks, bonds, mutual funds, ETFs, commodities and 529 college savings and prepaid plans—do get included in the EFC formulas.Trust funds must be reported regardless of whether or not the funds are currently available to you or your child. On the FAFSA, if only interest or principal will be available, the present value should be calculated by the trust officer and reported accordingly.
Parents’ total reportable assets will vary depending upon the EFC methodology, and from the reportable asset value a savings (emergency reserve) allowance of about $30,000 to $50,000 is subtracted to arrive at an available asset value. Parents are expected to use up to 5.64% (Federal) and 5% (Institutional and Consensus), of those available assets each year on college. Family controlled small businesses with fewer than 100 full-time employees, home equity and non-qualified annuities are not counted in the FM, but they are in the IM and CM, although, under the CM home equity is capped at 1.2 times the parent’s adjusted gross income.
Consumer Beware: Non-qualified annuities DO get counted on the CSS Profile, but not the FAFSA. Heed this warning before you decide to put all your liquid assets in insurance and annuity products to “hide them” for aid purposes. Read my post on Bad College Advice. Life insurance and annuities definitely have their place of course, but often not as peddled at local aid nights.
Retirement assets do not get counted, but your prior year’s contributions to qualified retirement accounts do get counted as untaxed income, and are added back to your adjusted gross income in the income portion of the aid formula. Life insurance cash values are not counted under any of the formulas, but a few highly selective colleges will ask about policy cash values in their supplemental questions on the CSS Profile. Personal assets like cars, clothes and household items do not count under any of the formulas, but collectibles do.
You Decide: Is a well-stocked wine cellar considered a “collectible” or a savvy liquid asset with subtle notes of financial aid?
Rental Properties
Rental properties are a popular tax and investment strategy among parents, but they do not qualify as a family controlled small business asset that can be excluded from the FAFSA. To be considered a business you must be providing a service such as laundry or cleaning. Don’t make the mistake of thinking that you can just throw your rental properties in an LLC and exclude the value as a small business on the FAFSA. Moreover, if your child attends a college that requires the CSS Profile in addition to the FAFSA, there is no exclusion for small business assets on the Profile, so the rental will be counted on the CSS Profile anyway.
Students must report the same types of assets as parents, but students do not have a savings allowance, so 100% of the value of student-owned assets gets counted. Student-owned assets are counted at a rate of 20% (FM), 25% (IM) and 5% (CM), but under the FM, 529 college savings accounts and Coverdell Education Savings Accounts (ESAs) are counted as parent’s assets (5.64%) even though they are owned by the student.
Parent Assets: Do The Math
If there is $25,000 in reportable assets that you own, and your asset protection allowance is $35,000, then there will be no contribution expected from the assets because the total reportable assets do not exceed the asset protection allowance. If you have $200,000 in reportable assets, you would be expected to make a 5.64% contribution from $165,000 of those assets ($200,000 – $35,000 =$165,000 times 5.64% = $9,306 each year).
Child Assets: Do The Math
If your child has $25,000 in savings account, the child will be expected to contribute 20% of the asset ($5,000) each year toward the cost of college under the federal methodology, 25% under the IM ($6,250) and only 5% under the CM ($1,250). If your child owns a 529 college account of Coverdell ESA the aid treatment is more favorable under the federal calculation. The same $25,000 in a 529 account will only be assessed at a maximum of 5.64%, and sometimes it may not be assessed at all.
Legislation was passed several years ago that changed the treatment of student-owned 529 and ESA assets for federal financial aid purposes. Now, under the federal need analysis formula only (not the IM or CM), 529 and ESA assets owned by students are considered assets of the parent for federal aid purposes, therefore they get more favorable aid treatment than other assets like savings accounts, mutual funds, stocks and bonds. So, for federal aid purposes (i.e. Pell grants, Subsidized Stafford loans, etc), if money is saved for college in 529 plans and ESAs in the child’s name, it has the same financial aid impact as saving in parents’ names. Remember, parents get an asset protection allowance. So if parental assets + student 529 assets combined are less than the asset protection allowance, the child’s 529 assets will not be counted at all.
Saving In Your Child’s Name Isn’t Always Bad
Based on your income alone, if your child’s EFC is high enough to prevent him from qualifying for need-based financial aid, then it doesn’t matter if your child has a pile of assets in his name or not. In fact, in some cases it can be a tax benefit to shift appreciated assets to your child, even under the so-called kiddie tax rules. The reason is so you can implement a variety of tax-saving tactics that employ the use of the standard deduction, personal exemption and the $2,500 American Opportunity Tax Credit on your child’s tax return during the college years, and minimize or eliminate the federal tax your child will owe. You’ll pay less tax this way than if you sell appreciated assets in your tax bracket, even with the kiddie tax.
I wrote about this in a previous post, College Tax Strategy: Wipe Out $25,000 In Capital Gains Per Year. Remember, before you pay the cost of college you have to pay taxes first, so reduce the tax cost of college reduces the overall cost of college. It is what I call “tax aid.”
Beware Grandparent-Owned 529 Plans
However, 529 plans that are owned by grandparents are not counted as an asset when a student completes the FAFSA, but they do ask for grandparent-owned 529 assets on the CSS Profile (financial aid form). The “Profile” asks for grandparent-owned 529 asset information, but like retirement assets, it is not factored into the EFC calculation. It is there for professional judgment purposes to provide aid officers with a more complete financial profile of the family when the student has extenuating circumstances that need to be considered for aid purposes. Therefore, grandparent’s 529 assets are usually not involved directly in the calculation of the student’s EFC under the institutional methodology. Unfortunately, distributions from grandparent-owned 529 plans do count against aid eligibility under all of the aid formulas.
More importantly, and far less understood is the fact that distributions from grandparent-owned 529 plans are technically considered a gift to the student, and treated as untaxed income for financial aid purposes, which can impact a student’s aid eligibility by up to 50% of the distribution. So having an asset in the form of a 529 plan account that is owned by the grandparent does not count as an asset in the student’s EFC (expected family contribution toward the cost of college), but if the grandparent makes a distribution from that 529 plan to help the grandchild pay for college, that distribution will be considered untaxed income of the student when the student completes the aid forms the following year. Ouch!
A New Twist
Something relatively new in the aid world is some public universities and less well-known private colleges are now requiring those students applying for admission early, either through the early decision or early action admission options, to complete the CSS Profile in addition to the FAFSA, while students applying under the regular admission process need only to complete the FAFSA. Applying for admission early is a proven way to boost a student’s chances of being accepted, but if more and more colleges require the CSS Profile when applying early, and a family’s finances look less favorable for aid based on the Profile, the unintended consequence may be a less favorable aid package.
At some colleges it is not even a matter of applying early that triggers the addition of the Profile. Applying to specific degree programs like engineering may require the CSS Profile be completed along with the FAFSA, where say, business, math or biology does not. Most of the elite colleges that offer an early admission option require the CSS Profile and FAFSA for all students that apply anyway, so this isn’t a factor among those colleges but I will reiterate two of the most critical factors in college aid eligibility: 1) Knowing ahead of time which colleges use which aid formulas, and 2) knowing how your family’s finances will be assessed under each formula and, therefore, each college.
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