FAFSA Part 2 – The Sequel
By Joe Messinger, CFP®
June 9, 2015
In our previous blog, you learned what FAFSA stands for, what it is used for, and about some filing tips you should be aware of. A lot of your questions may remain unanswered though:
- Should we save in our student’s name or in a parent’s name?
- How can grandma & grandpa save for their grandchild?
- What assets need to be included in the FAFSA? Are there some that aren’t?
- What about situations involving divorce?
- Do I have to file the FAFSA?
To start with the last question, yes—all schools who award need-based financial aid will require the FAFSA be completed. However, some schools (about 300 of them) also require a CSS Profile form. The Profile form will look at a lengthier list of assets and expenses than the FAFSA. For example, your home equity will NOT be included as an asset under the FAFSA form but WILL be included as an asset on the CSS form at most Profile schools. One benefit to the CSS form is a parent’s ability to include their expenses—monthly mortgage, medical expenses, elementary & high school tuition, and parent’s student loans to name a few. By including your expenses, colleges are trying to get a more complete picture of your actual financial need. Look out for a future blog post on the key differences between the FAFSA and the CSS Profile.
But back to the FAFSA, what assets need to be reported? In general terms, assets in retirement funds like 401(k), 403(b), and IRA plans are NOT included. Assets in savings and checking accounts, CDs, money markets, commodities, investment real estate, etc. ARE included. One important thing to point out is ALL 529 plans owned by a parent ARE included as an asset. If you have three kids with $10,000 in each account that you are the owner of, you have a total of $30,000 in 529’s regardless of who the beneficiary is. This point always gets a rise out of the crowd in our workshops!
Parents need to be aware they have an “Asset protection allowance”, an amount you are allowed to have in assessable assets equal to between $30,000 and $50,000 as an emergency reserve fund.* This amount is based on a parent’s age and will be deducted from your total asset value. For example if you had total assessable assets of $100,000 and your asset protection allowance was $30,000, you would only be assessed on $70,000.
*Please note an important and significant change to the amount of the Asset Protection Allowance will be effective 2016. Read our blog about it.
What about assets in a student’s name? Most of the time having the assets in a parent’s name will be the way to go for two reasons. A parent has the asset protection allowance mentioned above, and a child does not. A child’s assets are included starting at dollar one. In addition, a parent is expected to contribute 5.6% of their assets to a child’s education. The student is expected to contribute 20%.
How can grandma and grandpa help without hurting financial aid? 529 plan dollars in a grandparent’s name are not counted as assets for financial aid purposes. However, distributions from a 529 plan in a grandparent’s name will count against financial aid eligibility. Those distributions are considered gifts to the student and count as an untaxed income with a 50% assessment. One possible strategy for well-meaning grandparents is to save into a 529 plan in their name and then transfer it to the parent’s name early in the student’s high school years. Be sure your state’s plan allows for transfer of ownership.
Depending on how much money is in the 529 plan, the grandparents could also consider simply helping the student pay for their senior year of college after the student has submitted financial aid forms for the final time and aid has been distributed. Grandparents have the best intentions to help, but if you are a candidate for need-based financial aid you need to be aware of how your EFC, expected family contribution, is impacted. If you are not a candidate for need based aid, you don’t have to worry.
Two final tips for when the parents are divorced, the FAFSA looks at the finances of what they call the “custodial parent” with whom the student lives the most—not the parent who claims the student on their taxes. Also be aware a step parent’s assets will be reported if they live with the student. If you are a family with legitimate joint custody, consider having the student live with the parent less financially successful for 51% of the time and file the FAFSA form. (Click here to read our more detailed blog for divorced parents.)
Clear as mud? Every situation is different, and you may still have questions about how to get the most financial aid for your student. Please don’t hesitate to get in contact with Capstone, and we’ll be glad to help.
Something else to consider: 529 withdrawals can be tricky. Be sure to read our 529 Plan Owners Beware – Use your funds wisely or pay the price blog to avoid any issues.