Parent assets seem to be the area that most families and planners focus on, despite the fact that they typically have the smallest impact on the formula of each of the components. Strategies and tactics to minimize parent assets abound, but for most families these result more in nibbling around the edges than actually making a significant dent in EFC.
The quick summary is, first, all parent assets are added. Next, an asset protection allowance is subtracted to determine “Discretionary net worth.” Finally, this number is multiplied by the asset conversion rate of 12% to determine the Contribution from Assets.
The Contribution from Assets is added to the Available Income in the FAFSA formula to come up with Adjusted Available Income (AAI); AAI is then subjected to the graduated rates up to 47%. Since you’ve probably heard that assets are assessed at 5.64%, the way we reach that is 47% x 12%.
Let’s break that down a little bit. First, what counts as parent assets?
- Cash, checking and savings accounts
- “Net worth of investments including real estate”
- Businesses and farms owned by the parents, but only those with more than 100 employees and/or investment farms
The middle one, “net worth of investments,” seems to generate the most confusion. The questions I hear most frequently are:
- Do I have to count all of my 529 accounts, or just the one for the student whose FAFSA this is? Yes, you count all of them. FAFSA instructions say, “For a student who must report parental information, the accounts are reported as parental investments in question 91, including all accounts owned by the student and all accounts owned by the parents for any member of the household.” Note that this specifically references accounts owned by the parents; grandparent- or other non-parent-owned 529s do not get reported as assets.
- What about a vacation home? Yes, count your equity in the property (market value minus outstanding mortgage). You may subtract selling costs such as real estate agent fees from its value. Same goes with an investment property.
- Can I subtract credit card debt? No. But you can use the cash, checking or savings accounts to pay off the credit card and reduce balances that way.
- Equity in your primary residence
- Cash value of life insurance policies
This does not mean you should cash in your investments and buy a life insurance policy or pay down your mortgage to get financial aid. Here are more details on why that’s a bad idea. A better idea is to spend money that you plan to spend anyway, before filing the FAFSA. That includes making retirement contributions, paying down credit cards or other consumer debt, or making large purchases or cash or stock charitable contributions that you have already planned and budgeted for.
The Asset Protection Allowance is a topic of great fascination to many people. Unfortunately, due to how it’s calculated, it is vanishing faster than the Amazon rainforest. The maximum Asset Protection Allowance for a single parent household this year is $3,000 (though most such households will only get around $2,000); for a two-parent household the maximum is $9,400 but most will only get around $6,000. Here is the full Asset Protection Allowance table:
Still with me? Here are the FAFSA notes for assets:*
“Net worth means the current value, as of today, of investments, businesses, and/or investment farms, minus debts related to those same investments, businesses, and/or investment farms…
“Investments include real estate (do not include the home in which you live), rental property (includes a unit within a family home that has its own entrance, kitchen, and bath rented to someone other than a family member), trust funds, UGMA and UTMA accounts, money market funds, mutual funds, certifcates of deposit, stocks, stock options, bonds, other securities, installment and land sale contracts (including mortgages held), commodities, etc.
“Investments also include qualifed educational benefts or education savings accounts (e.g., Coverdell savings accounts, 529 college savings plans and the refund value of 529 prepaid tuition plans). For a student who does not report parental information, the accounts owned by the student (and/or the student’s spouse) are reported as student investments in question 42. For a student who must report parental information, the accounts are reported as parental investments in question 91, including all accounts owned by the student and all accounts owned by the parents for any member of the household…
“Investments do not include the home you live in, the value of life insurance, retirement plans (401[k] plans, pension funds, annuities, noneducation IRAs, Keogh plans, etc.) or cash, savings and checking accounts already reported in questions 41 and 90.
“Investments also do not include UGMA and UTMA accounts for which you are the custodian, but not the owner. Investment value means the current balance or market value of these investments as of today. Investment debt means only those debts that
are related to the investments.
“Business and/or investment farm value includes the market value of land, buildings, machinery, equipment, inventory, etc. Business and/or investment farm debt means only those debts for which the business or investment farm was used as collateral.
“Business value does not include the value of a small business if your family owns and controls more than 50 percent of the business and the business has 100 or fewer full-time or full-time equivalent employees. For small business value, your family includes (1) persons directly related to you, such as a parent, sister or cousin, or (2) persons who are or were related to you by marriage, such as a spouse, stepparent or sister-in-law.
“Investment farm value does not include the value of a family farm that you (your spouse and/or your parents) live on and operate.”
* Notes are from last year’s FAFSA; see page 9. This year’s is not yet available. Don’t be confused by the date at the top; that refers to the school year.