By Mary Nickeson, Senior Vice President,Invite Education
February 23, 2021
One common misconception about paying for collegeis that parental assets and savings will greatly hurt your child’s chances of receiving financial aid.
Some parents hesitate to save for college, believing that colleges will expect most of their savings to go toward tuition, resulting in their child forgoing substantial financial aid dollars. However, if families routinely save using a 529 plan they are generally in a much better college savings position overall.
While assets do matter to varying degrees depending upon numerous factors, parents’ stress about their savings and investments is usually worse than the actual impact of their assets on their financial aid determinations. This is more likely to be true for moderate to lower-income families. The following information from the U.S. Department of Education explains why assets may play a smaller role than you’d think.
What Matters Most in Calculating the Expected Family Contribution (EFC)
- Parental assets are calculated at up to 5.64% through the Free Application for Federal Student Aid (FAFSA). That means of $10,000 in savings, approximately $564 (or less) would be counted toward the EFC, potentially reducing a financial aid package by $564 (or less).
- Parental and student income are generally the primary determinants of financial aid.
- Parental income is counted at a rate of 22% to 47% through the FAFSA.
- Student income is counted at a rate of 50% after taking into consideration the student’s income protection allowance ($6,970 for 2021-2022).
- Student assets are calculated at up to 20%
- For families with dependent students where the parental adjusted gross income is under $50,000, assets are generally not counted at all.
- The FAFSA also includes two simplified financial aid formulas, the Simplified Needs Test that excludes assets and theAutomatic Zero EFC.
- Each of these formulas combines a parent income threshold—less than $50,000 and $26,000 respectively, with a set of other eligibility criteria.
- The Simplified Needs Test income threshold is expected to increase to $60,000 for 2023-2024.
- For dependent students who do not qualify for a simplified EFC formula, there are generally key protections for certain parent-owned assets, including home equity and retirement funds, and an overall asset-protection allowance that shields some savings.
The Importance of Saving and Completing the FAFSA
Each fall, high school seniors and college students need to complete the FAFSA to be eligible for nearly all types of financial aid in the following school year. The FAFSA collects information on parental and student income and certain assets that the government uses to calculate the amount it expects you to pay annually for college—the Expected Family Contribution (EFC). The basic formula for calculating your eligibility for financial aid is the Cost of Attendance at a college minus your EFC.
Keep in mind that some colleges are not able to meet the student’s full financial need, and loans may be offered by the college to meet your total need. Since parental assets do not play as large of a roll in the overall formula to determine your student’s need for financial aid, the more dollars you save now, the fewer you may need to borrow and pay back with interest in the future.
About the author:
Mary Nickeson is the Senior Vice President atInvite Education.Invite Education provides customized calculators and decision-support toolsto help families, employees, and advisors make college-funding decisions with confidence.
FAQs
The FAFSA gives a parental asset protection allowance between about $30k and $50k. So, if your parents don't have more than that in assets, these resources won't be counted anyway. And above that threshold, it's only about 5-6% of the net value of the parental assets that count toward your EFC.
Do your parents assets affect financial aid? ›
The FAFSA formula assesses relevant parent assets at a maximum of 5.64%. The federal formula assesses child assets, which would include all custodial accounts as well as a child's own savings/checking, at 20%.
Should I answer questions about my parents assets on FAFSA? ›
It doesn't matter if you don't live with your parent or parents; you still must report information about them if you're considered a dependent student for FAFSA purposes.
Can you get financial aid if your parents are wealthy? ›
There are NO income limits for completing the FAFSA. It merely establishes your expected family contribution (EFC) for needs-based federal financial aid. It is true that most wealthy families will not qualify for this type of needs-based aid. Where the potential lies is with discretionary funds called merit based aid.
What is the parent asset allowance for FAFSA? ›
The asset protection allowance peaked in 2009-2010. At that time, the allowance for single parents aged 65+ was $84,000. In contrast, the allowance for the same group was $9,500 in 2020-2021. The Federal Register shows that, in 2022-2023, the FAFSA asset protection allowance will be $0 for single parents of all ages.
Should I skip parents assets on FAFSA? ›
If you're an independent student, you don't need to provide parental information and may skip the questions about parent household and finances. Note: Some colleges and career schools may require an independent student to provide parental information.
At what age does parents income not affect financial aid? ›
A student age 24 or older by Dec. 31 of the award year is considered independent for federal financial aid purposes.
Can I skip parents assets questions on FAFSA? ›
You can only skip FAFSA questions about assets if you meet the qualifications to do so based on your answers to other questions on the application. However, that's only because your asset information at that point doesn't affect your eligibility for federal student aid.
How do you answer asset questions on FAFSA? ›
How to answer these questions. Don't include your parents' assets. Enter the current total of any cash you have, and the combined total of all your checking and savings accounts.
Why skip questions about assets on FAFSA? ›
Depending on your financial situation, you may be able to skip certain questions regarding income and assets. Skipping questions won't impact your eligibility for federal student aid, but it might affect eligibility for certain state-specific aid.
Basically, there is no set income cutoff for aid. If you still think your parents are too wealthy to access financial aid, consider using either the Federal Student Aid Estimator or your school's net price calculator.
Can I get financial aid if my parents make over 150k? ›
Both students and their parents often think their household income makes them ineligible for financial aid. However, there's no income limit for the FAFSA, and the U.S. Department of Education does not have an income cap for federal financial aid.
What disqualifies you from getting financial aid? ›
Other reasons for financial aid disqualification include: Not maintaining satisfactory progress at your college or degree program. Not filling out the FAFSA each year you are enrolled in school. Defaulting on a student loan.
Does FAFSA check parents bank accounts? ›
Students selected for verification of their FAFSA form may wonder, “Does FAFSA check your bank accounts?” FAFSA does not directly view the student's or parent's bank accounts.
What assets are not considered for college financial aid? ›
Non-reportable assets
Qualified retirement plans, including 401(k), Roth 401(k), 403(b), IRA, Roth IRA, SEP, SIMPLE, Keogh, profit sharing, and pension plans. Qualified annuities are also not counted on the FAFSA.
How do I shelter assets from FAFSA? ›
A good strategy for sheltering assets is to use them to pay down debt. Using assets to pay off credit card balances, auto loans, and mortgages can not only make the money disappear, but it also represents good financial planning sense.
Will I get financial aid if my parents make over 500k? ›
The good news is that the Department of Education doesn't have an official income cutoff to qualify for federal financial aid. So, even if you think your parents' income is too high, it's still worth applying (plus, it's free to apply).
