Maximizing Financial Aid: What Parents Need to Know About Assets and Income on the FAFSA

The Impact of Assets on Financial Aid

When filling out the FAFSA, both your assets and those of your child are considered to calculate your Expected Family Contribution (EFC). This EFC is a measure of your family’s financial strength and determines the type and amount of aid your student is eligible to receive. However, not all assets are treated the same, and knowing this can help you make strategic decisions to optimize your financial aid outcomes.

1. Parent vs. Student Assets

Parent assets are assessed at a significantly lower rate compared to student assets. Typically, parent assets are counted at a rate of up to 5.64%, while student assets can be assessed at 20%. This difference means that savings in your child’s name can heavily reduce their financial aid eligibility.

Tip: Consider keeping savings and investments in the parent’s name rather than the student’s to minimize the impact on financial aid. For instance, using a 529 college savings plan, which is treated more favorably under the FAFSA, can be a strategic move.

2. Protected Assets

Certain assets are not considered when calculating your EFC. Retirement accounts such as 401(k)s, IRAs, and pensions are excluded from the FAFSA, allowing you to save for retirement without negatively impacting your child’s financial aid. Additionally, the equity in your primary home isn’t counted, so paying down your mortgage instead of holding cash assets could be advantageous as you approach the college application period.

Tip: Working with your Allworth advisor can help you maximize contributions to retirement accounts and make strategic decisions about managing other assets. This guidance can ensure that you’re not only preparing for retirement but also positioning your family to receive the maximum possible financial aid.

3. Assessing Real Estate and Investments

If you own rental properties or other investments, these will be counted as assets on the FAFSA. Rental properties are considered investments, and their net value (after debt) is factored into your EFC. Similarly, non-retirement investments like stocks, bonds, and mutual funds are included in the calculation.

Tip: An Allworth Financial advisor can assist in evaluating your investment portfolio to determine the most effective strategies for managing these assets. By aligning your investments with your overall financial goals, you can reduce their impact on financial aid eligibility.

Income Thresholds and Their Effect on Financial Aid

Income is the most significant factor in determining your EFC, directly influencing your student’s eligibility for need-based financial aid. While there’s no strict income cutoff for aid, understanding how income is assessed can help you plan effectively.

1. The Income Protection Allowance

The FAFSA includes an “Income Protection Allowance,” which excludes a portion of your income from being counted towards your EFC. This allowance considers basic living expenses, meaning that only income above this amount is assessed. However, income exceeding this threshold is assessed at a higher rate, reducing potential financial aid.

Tip: If you anticipate a particularly high-income year, such as receiving a bonus or selling investments, it might be beneficial strategically time these events to avoid inflating your income for financial aid purposes, potentially improving your child’s financial aid package.

2. How Adjusted Gross Income (AGI) Affects Aid

Your Adjusted Gross Income (AGI) includes wages, dividends, and other forms of income, and it plays a central role in determining your EFC. A higher AGI leads to a higher EFC and reduces the financial aid your child may receive.

Tip: Your Allworth advisor can work with you to explore strategies for reducing your AGI, such as maximizing contributions to tax-deferred retirement accounts or Health Savings Accounts (HSAs). By lowering your AGI, you may improve your child’s chances of receiving more financial aid, while also benefiting your long-term financial plan.

3. Business and Farm Income

If you own a small business or farm, the income from these operations can impact your EFC. However, the FAFSA offers some protection for families who own and operate a small business or farm. For example, if your family owns a small business with fewer than 100 employees, or if the farm is your primary residence, these assets may not be included in your EFC calculation.

Tip: If you’re a business or farm owner, by accurately representing your situation and taking advantage of the protections available, you can potentially reduce your EFC and increase financial aid eligibility.

Planning Ahead with Your Allworth Financial Advisor

Understanding how your assets and income influence financial aid eligibility is key to maximizing the support your student receives. At Allworth Financial, your advisor is here to help you make informed decisions that align with your financial goals and optimize your child’s aid package. They can help you strategize around key financial decisions—such as the timing of income, managing assets, and understanding how different financial moves might impact your FAFSA results.

The FAFSA is more than just a form; it’s a critical step in securing financial aid for your child’s college education. By working closely with your Allworth advisor, you can navigate the intricacies of how assets and income affect financial aid. With the right strategies in place, you can help your child achieve their educational goals while also safeguarding your financial future.