One of the keys to qualifying for financial aid is to position your assets appropriately before you fill out the FAFSA form. The FAFSA, or Free Application for Federal Student Aid, is the form that parents fill out typically in the winter of their student's senior year of high school. It is the key document that schools use to determine what your family can afford to pay for college and the financial need of the student.
How is your need determined?
Financial need is simply the difference between a school's Cost of Attendance and a family's Expected Family Contribution, or EFC, as determined by The Free Application For Federal Student Aid. Nearly all schools require the FAFSA form to be filled submitted before they will provide financial aid. However, many private schools also use a form called the CSS Profile to dig more deeply into a family's finances.
Since every private school that uses the CSS Profile form can use the information differently, I won't go into great detail about that form here. But since nearly every school uses the FAFSA form, let's review what is included in the FAFSA form.
What is included in the FAFSA?
On a simple level the FAFSA looks primarily at the following:
• Parent Assets
• Student Assets
• Parent Income
• Student Income
• Number of Students in College
Parent Assets: Parent assets are assessed at a rate of 5.6 percent of "eligible" assets. So, if parents had $100,000 in eligible assets their EFC would be at least $5,600 based on that one fact alone.
Student Assets: Student assets are assessed at a rate of 20 percent, and ALL of a student's assets are considered "eligible." If a student had $100,000 in eligible assets (big numbers keep the math easy), their EFC would be at least $20,000 based on that one fact alone.
Parent Income: The best way I can describe how parents' income is treated on the FAFSA form is to give you an analogy. Parent income is assessed for financial aid similar to the way income is assessed for taxes -- the more you make, the greater the percentage of your income they expect you to contribute to the cost of your student's education.
Student Income: Is assessed more like the so-called flat tax. 50 percent of everything the student earns above a certain dollar amount is expected to go towards paying for college.
Number of Student's in College: This one is easy. Simply take your Expected Family Contribution and divide it by the number of students in college. Divide by one, no difference. Divide by two and your EFC is cut in half -- roughly.
What is NOT included in the EFC?
Certain types of assets are exempt on the financial aid form. Here is where many of your planning opportunities to qualify for financial aid come into play.
Asset Protection Allowance: All families have a certain amount of money that is not subject to the EFC calculation. That amount will vary based on your marital status and the age of the older parent. In my case, I am married and 50 years old. My cash reserve would be about $44,000. If I was single, it would be a little less than half that amount.
Home Equity: On the FAFSA form the value of your home equity is an exempt asset. Specifically, the equity you have in your primary residence -- not rental property or vacation property or your share of the family cabin that you inherited from your parents. Theoretically, you could own a $1,000,000 home that is paid for and it would have no impact on your EFC if it is your primary residence. Private schools using the CSS Profile form might treat that asset differently. Ask them.
Cash Value of Life Insurance: This too is an exempt asset on the FAFSA form. I don't normally recommend purchasing life insurance as a way to pay for college, but just know that if you have life insurance with a cash value, that asset does NOT go on the FAFSA form.
Equity in a Small Business: If you meet certain criteria, the equity in your business or farm may also be an exempt asset. For some people this can present considerable planning opportunities.
Retirement Plans: Retirement plans of all types including IRAs, 401(k) plans and 403(b) plans are exempt on the FAFSA form.
There might be only a few types of assets that are exempt on the FAFSA form, but there are many ways to combine these things to reduce your EFC and increase your eligibility to qualify to financial aid. The key is to figure out the best way to make the most of your resources to improve your eligibility to qualify for financial aid.
I do not recommend families hide money or game the system to get additional financial aid. However, I do recommend that you know the financial aid rules, work within those rules and adjust your college planning accordingly.