The FAFSA requires students and their parents to provide information about their income and assets in order to determine what is called the Expected Family Contribution or EFC. More specifically, the FAFSA wants to know about your income from the previous tax year (2017, if you complete the FAFSA for the 2018-2019 school year), and the value of your assets as of the day you fill out the form.
With smart planning families can complete the FAFSA in a way that maximizes their opportunities to receive need-based financial aid for college. Since the FAFSA asks about the value of your assets on the day you fill out the form, the time to reposition assets and implement your plan to pay less for college starts before you complete the FAFSA.
The following 5 assets are exempt on the FAFSA and are not counted in the EFC calculation.
Asset Protection Allowance. Though not a specific asset, the Asset Protection Allowance permits parents to have a certain amount of money that has no impact on the EFC calculation. These assets could include cash, mutual funds, stock options or just about any financial asset.
To be clear, the value of your assets is still reported, but the first dollars don’t count in the math. For example, a 48-year old married couple filling out the form would have an Asset Protection Allowance of $11,900 according to the U.S. Dept. of Education.
For example, you as the parent might have $100,000 in your savings account on the day you complete the FAFSA, but the first $11,900 doesn’t get counted.
Your kids however, have no such asset protection allowance. 100% of their money is considered fair game and is reported on the FAFSA form. So, if your kids have savings, UTMA accounts, or other assets that are titled in their name, it all counts.
Home Equity. The equity in your primary residence is also exempt on the FAFSA form. You could live in a multimillion dollar home and if it is your primary residence, it does not get counted toward your EFC.
For some families, paying off or paying down your mortgage might be an idea to consider. Doing so reduces your asset base, reduces or eliminates any remaining interest you may owe on your mortgage and frees up your mortgage payment to be redirected towards college expenses.
Don’t worry about missing the tax deduction. With the new tax law change that went through many households will take the standard deduction rather than itemizing their deductions this year. Plus, if you are down to the last dollars on your mortgage, your interest deduction isn’t as big as it used to be anyway.
Life Insurance Cash Value. I am not a huge fan of buying life insurance for college planning, but if you need the insurance and own it already, know that your cash value does not get reported on the FAFSA. Since life insurance cash value is exempt and many policies offer low interest or no interest loans, adding money to your policy may be a strategy to consider.
Be careful before you add money to your insurance. Doing so may lower your EFC, but that doesn’t always mean you will get more financial aid. Insurance policies also have surrender fees and other expenses that could lessen the benefit of adding money to your policy.
Talk to your insurance agent or financial advisor before taking this step.
Small Business Assets. The FAFSA says that assets owned by a small business are exempt on the FAFSA form as long as the business has fewer than 100 employees and meets a few other basic criteria.
For small business owners who are “asset rich” but have lower incomes, this is huge. It means that your land, any buildings owned buy your business, all business equipment are exempt on the FAFSA form.
If you own a small business that meets the requirements for exemption on the FAFSA form, maybe now is the time to put some money into your business. Don’t do it unless it makes business sense, but if it does make sense to buy a new piece of equipment or pay off a business loan, the time to do it is before you fill out the FAFSA.
Retirement Accounts. IRAs, Roth IRAs, 401(k) accounts and other retirement accounts are all exempt on the FAFSA form. Do not include these assets when you complete the FAFSA. While there are limits to what you can contribute to these plans, there is no limit on how much money you can have in them. Got a $1 million IRA or 401(k), great. Don’t include it on your FAFSA form.
Even if you have a high income and your 401k is fully funded, you may still be able to stash some cash into an IRA or other retirement plans. IRAs have income limits and other restrictions for those who want to deduct their contributions from their taxable income. However, the IRS does allow traditional, non-deductible IRAs up to the contribution max of $5,500 per year (plus $1,000 catch up contributions if you are age 50 or older).
Plan ahead and consider the tradeoffs.
Now may be the time to fully fund your 401k, pay off your mortgage or set aside some additional dollars into an IRA. The more you can reduce your asset base prior to completing the FAFSA, the lower your Expected Family Contribution will be. By doing some advance planning you may be able to lower your EFC enough to result in a higher financial aid award.
However, none of this guarantees that you will necessarily get more financial aid. Financial aid will vary from school to school and family to family, even student to student within the same family. Everyone’s situation is different.
Before repositioning any assets be sure to consider any trade offs or other consequences to your actions. Talk to your financial planner, tax professional and other qualified experts. Come up with a plan that works for you and your student. And be sure any changes you make to your financial situation are in your long-term best interest and will actually make a difference in your financial aid award.
For more information: This is the 5th and final post in a series dedicated to helping parents pay less for their kids’ college education. To learn more about how to pay less for college subscribe to my blog, attend one of my Pay Less For College workshops at one of the high schools listed here, or contact me directly.
Can’t make it to a workshop? No problem. Simply contact me through the website and I will be happy to schedule a short phone call to discuss your situation in more detail.