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 Student Aid Index.
The quick summary is, first, all parent assets are added to arrive at net worth. Next, an asset protection allowance, based on the parents’ marital status and age, is subtracted. Finally, this number is multiplied by the asset conversion rate of 12% to determine the Parent Contribution from Assets or PCA.
The PCA is added to the Parents’ Available Income in the FAFSA formula to come up with Parent Adjusted Available Income (PAAI); PAAI 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?
- Child support received in the previous year
- Cash, checking and savings accounts
- Net worth of investments
- “Adjusted net worth of business and/or farm”
The third 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 or the parent who is filing the FAFSA if the parents are divorced; 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.
- Do I have to report my retirement accounts? No. Retirement savings accounts including 401ks, 403bs, 457s, traditional and Roth IRAs are not reported as assets.
Two items are new to assets this year: Child support and adjusted net worth of business and/or farm. Child support used to be reported in income; now, a parent receiving child support reports the total received in the previous calendar year as an asset.
Adjusted net worth of business and/or farm is a little more complicated. Previously, only large businesses— those with more than 100 employees— needed to be included on the FAFSA. Now any business owned by the parent is reported as an asset, albeit at a discounted rate. To calculate the adjusted net worth of the business, start by calculating your business’ value, then subtracting liabilities including current liabilities— any amount that must be paid in the coming 12 months. This includes salaries, rent, utilities, insurance premiums, etc. The resulting amount is subjected to a formula much like tax brackets to arrive at the “adjusted net worth”:
- 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 considerably less than the amount most of us would like to protect. The maximum Asset Protection Allowance for a single parent household this year is $3,900 (though most such households will only get around $2,400); for a two-parent household the maximum is $10,500 but most will only get around $6,400. 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, certificates of deposit, stocks, stock options, bonds, other securities, installment and land sale contracts (including mortgages held), commodities, etc.
“Investments also include qualified educational benefits 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.”
* 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.
See SAI Formula Guide for the 2024-25 FAFSA for more.