Back in May, the Department of Education released its needs analysis methodology for the 2016-2017 school year’s FAFSA EFC calculation. The big numbers to know from this are the Income Protection Allowance (the amount of parent and student income that is not considered available to pay for college) and the Asset Protection Allowance (ditto for nonretirement assets). The Asset Protection Allowance was updated in August. Now that college application season is in full swing, let’s take a look.
The Income Protection Allowance differs based on family size and number of students attending college that year. Household income above that level is assessed on a sliding scale up to 47%. The Asset Protection Allowance is based on the age of the oldest parent and whether or not the parents are married. Assets above the allowance are assessed at 5.6%.
One would assume that both the Income and Asset Protection Allowances would increase at least nominally each year. Unfortunately, that assumption is incorrect. The Income Protection Allowance did in fact increase nominally. Here are the amounts for 2015-2016 and 2016-2017 for a family of four with two college students:
- 2015-2016: $24,030
- 2016-2017: $24,390
That’s about a 1.5% increase, which is at least better than a stick in your eye.
Unfortunately, the Asset Protection Allowance seems to be falling off a cliff. Here are the same two years’ amounts for married parents when the oldest is 45:
- 2015-2016: $28,200
- 2016-2017: $17,400
That’s an almost 40% drop in one year– and that’s after it was adjusted upwards from the original $6,300 allowance that was published back in May. (If you want to understand the formula behind this, read Edvisors’ excellent description here.)
What does this mean in terms of aid awards? The average 529 account balance is about $20,500. For simplicity’s sake, let’s assume that’s all the nonretirement assets a family has. Last year, all of that would have been sheltered by the allowance. This year, $3,100 would exceed the allowance and thus be assessed at 5.6%, causing the family’s EFC to increase by about $173. However, the allowance doesn’t count how many college students the family has, so let’s go back to our family of four with two students, each with $20,500 in their 529 account. Their assets are $20,500 + $20,500 – $17,400 = $23,600, which would increase their EFC by $1,322.
Nothing– and I repeat NOTHING— in this says “stop saving for college.” Yes, more families will see their EFC increase this year based on the lower asset protection allowance. But an increase of even $1500 to EFC is more than outweighed by the availability of savings to help pay for college.