How Different Assets Affect College Financial Aid

By: Allison Schmidt, Financial Advisor, CPA, CFP®

It’s almost the start of another school year and a question I get quite often in regards to college savings plans is, “how will this account affect my kid’s chance of getting financial aid?”  Great question.  This whole process starts by filling out a Free Application for Federal Student Aid (FAFSA); from there, colleges & universities use this information and your personal tax return to calculate the Expected Family Contribution (EFC).  Not all funds you have saved are created equal, and the type of vehicle you use to save for college expenses will determine the answer.  Here are a couple common holdings parents own that will affect their ability to receive financial aid.

• Retirement accounts (401k, IRA, 457, 403b, etc):  These are not included in the calculation of EFC, assuming you don’t withdraw from them to pay for college.  For example, you are allowed to withdraw from your Roth IRA penalty-free to pay for college; however, then 50% of that amount would used when calculating EFC in that year.  You do have to file a FASFA form each year; however, they actually use your income from 2 years prior, so 2016 income for 2018.   Withdrawing from these accounts during your student’s freshman year would show up on the junior year FASFA.  If you’re going to use these assets, maybe it makes sense to make the withdrawals in their junior or senior year…

• Home equity:  The equity in your primary home, or the difference between what your house is worth and the outstanding mortgage, is not included in calculating what you qualify for in terms of aid.  However, a second home or rental properties, on the other hand, does go into the calculation.

• UTMA or UGMA accounts:  These are custodial accounts which will ultimately be owned by the student once they are old enough.  These are considered student assets.  20% of these assets will be considered available to pay for college. Additionally, any interest, dividends, etc. reported on the student’s income tax return will be assessed at 50%.*  

• Parents’ Investment and Savings accounts: Up to a certain level, these assets will be covered by the government’s asset protection allowance.  The allowance ranges from  $1,100 to $31,900 for parents, based on age and marital status. This makes sense given that the government wants to give additional protections as you get older. The older you are, the more of your money qualifies for asset protection (this amount increases if there are two parents, instead of just one).  Then the assets over the allowance will be taken into consideration, but since they are a parental asset just 5.64% of those assets will be considered available to pay for college.  For example, if you have $200k saved in non-retirement assets and the allowance is $30k, $170k would be considered and at 5.64%, from those assets $9,588 would be expected to be used to fund college each year. Table A5 shows the breakdown of how the asset protection allowance works. (Chart provided by the Federal Student Aid office in the Department of Education). 

• 529 college savings plans: These are counted as a parental asset, which only 5.64% of parental assets are considered available to pay for college each year, as opposed to student assets which are assessed at 20% each year.* 

Planning far enough ahead can allow you to “shelter” assets from the calculation, primarily in retirement plans.  Just be sure to consider starting to increase those contributions before your student is a junior in high school.  Contributions to retirement accounts are actually added back to income in the year of assessment.  Additionally utilizing 529 accounts for college savings, as opposed to UTMA or UGMA accounts, can be helpful. 529  accounts essentially keep the funds as a parent asset (5.64%) instead of a student asset (20%).  But at the end of the day, the most important piece is saving for college. College expenses can be a parent’s largest outlay for their children and it certainly doesn’t appear to be getting any cheaper.  Save early and often.  

*Source: https://fafsa.gov

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Withdrawals from Roth IRA accounts may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings. Please consult with your tax advisor before investing.