If I were the betting type, I’d bet that the Asset Protection Allowance is the part of the FAFSA that gets the most attention. For this fall’s FAFSA, there’s a little bit of good news: It’s finally going up! This should be tempered by: Not by much!
The Asset Protection Allowance is probably the strangest calculation in all of FAFSA Land. Why is it going up for a change? After a decade of slowly rising median household income and low inflation, we may have finally hit the tipping point. Of course, the economic fallout of the pandemic is likely to change that trajectory.
Setting all of that aside, here is some data. The Federal Need Analysis Methodology for the 2021-22 Award Year shows that most married parents will see their Asset Protection Allowance increase by $600 or more; most single parents will be able to shield at least $400 more than last year.
What does that really mean? Since only 5.64% of assets above the Asset Protection Allowance count towards, EFC, having $600 less in FAFSA assets would decrease a family’s EFC by a whopping $34. However, even if the numbers are small, you should take reasonable actions to reduce your assets that might count towards your EFC. Since you have a few months, here are some suggestions:
- Make a Roth IRA contribution with any extra money in your checking account. Retirement assets don’t count, so shifting money there takes it out of the formula. If you discover later that you weren’t eligible for the contribution, or that you need the money for something else, there is a process to withdraw it penalty-free.
- Figure out which days of the month you have the least money in your bank account– typically after your mortgage/rent is paid but before the next paycheck hits– so you can be prepared to file the FAFSA in that window.
- Plan to pay your credit card bill and any other bills before filing the FAFSA, regardless of its due date.
- Parents of returning students should find out their school’s FAFSA due date– generally in the spring– and plan towards that.
And, while parents tend to obsess over their own assets, the more impactful assets are the student’s. That’s because students get an Asset Protection Allowance of $0 and 20% of their assets count in the EFC. A student with a summer job is therefore likely to get hit in the formula– every $500 in their bank account will increase their EFC by $100. Here are some things you can do to shelter your student’s assets:
- Any money they earn that is specifically for college can be put into the parents’ 529 account. In some states, the student will even get a tax benefit for that.
- Students with earned income can contribute to a Roth IRA. If they are under 18, the parent will open it as a custodial Roth.
- Families might choose to have their student pick up some personal or household expenses in the fall to spend down their bank account and then reimburse them post-FAFSA filing.