Does the federal financial aid formula count all parental assets?
The federal methodology for financial aid examines your family's income, assets and household information to calculate your expected family contribution, or EFC. Your EFC represents the amount of money the government deems you can afford to put toward college costs each year before any financial aid is forthcoming.
The federal methodology counts some parental assets and excludes others in arriving at your EFC. These assets are referred to as assessable and non-assessable assets. The more assessable assets your family has, the higher your EFC. The following assets are excluded from the federal methodology:
- Retirement accounts (e.g., 401(k)s, all IRAs)
- Annuities
- Cash value life insurance
- Home equity in primary residence
- Personal items (e.g., cars, furniture)
- A family farm
Keep in mind that your assets for financial aid purposes are those you own at the time you sign the Free Application for Federal Student Aid (FAFSA).
Assessable assets are all other assets of the parent. These include items such as checking and savings accounts, money market accounts, certificates of deposit, stocks, bonds, mutual funds, U.S. savings bonds, certain 529 plans, trusts, limited partnerships, vacation homes, investment properties and business assets.
When a family's total assessable assets are counted, the federal methodology grants parents an asset protection allowance that lets them exclude a certain portion of their assets from the final tally. The amount of the allowance varies, depending on the age of the older parent at the time the student applies for aid – the older the parent, the greater the allowance. For example, for the 2011/2012 school year, the asset protection allowance for a two-parent family where the older parent is 48 years old is $46,200; the figure jumps to $54,300 if the older parent is 54 years old.
How are 529 plans treated for federal financial aid purposes?
There are three instances when 529 plans – which include both college savings plans and prepaid tuition plans – need to be listed as an asset on the FAFSA: (1) the account owner of the 529 plan is the parent; (2) the account owner of the 529 plan is the student, and the student files the FAFSA as a dependent student; or (3) the 529 plan is a custodial 529 account (UTMA/UGMA custodial funds have been used to establish and/or fund the 529 plan), and the student files the FAFSA as a dependent student. In each of these cases, the 529 plan must be listed as a parental asset on the FAFSA.
What does this mean? Under the federal methodology for financial aid, a parent's assets are assessed or counted at a rate of 5.6%. This means that every year, the government deems 5.6% of a parent's assets available to contribute to college costs. Student assets are assessed at a rate of 20%.
When does a 529 plan not need to be listed on the FAFSA? Even if the account owner falls into one of the three categories above, if the account owner has an adjusted gross income below $50,000 (and a few other requirements are met), the 529 plan does not need to be listed. Also, if a grandparent, other relative or friend is the account owner of the 529 plan, it does not need to be listed on the FAFSA.
A corollary to the rule that a parent-owned 529 plan must be listed as an asset on the FAFSA is that if a parent is the account owner of multiple 529 plans (which may be the case if a parent opens separate 529 accounts for each child in the family), then the parent must list the value of all 529 plans, even if only one beneficiary is currently applying for aid. Colleges, however, generally apply a more logical rule when deciding whether to count 529 plans for purposes of distributing their own institutional aid. Specifically, families must list the value of all 529 plans that name the student as beneficiary, so a plan owned by a grandparent with the student as beneficiary would have to be reported, while a plan owned by a parent with the student's younger sibling as beneficiary would not.