FAFSA Tips: How to Shelter Your Savings and Get More College Aid

The Free Application for Federal Student Aid or FAFSA looks at both your family income and assets in determining your eligibility for college aid.

In a previous post, I outlined steps you can take now to reduce the income you must report on the FAFSA. This post explains the other part of the equation—how to shelter your assets to maximize your aid.

There are basically two types of assets for FAFSA purposes: those you have to report and those you don’t.

Your reportable assets include bank and brokerage accounts, CDs, stocks, bonds, mutual funds, money market accounts, college savings plans, trust funds, real estate, and other investments.

Your nonreportable assets include the equity in your family home, qualified retirement plan accounts (including pensions, annuities, IRAs, 401(k) plans, and similar accounts), and any small businesses owned and controlled by your family.

To get the most financial aid, consider shifting some assets from reportable categories into nonreportables one before you sit down to fill out your FAFSA. (The asset information you supply on the FAFSA is basically a snapshot of your finances at that point in time.)

For example, you might use some money from reportable assets like bank accounts and mutual funds to pay down the mortgage on your home, which doesn’t count as an asset on the FAFSA. (However, your home equity is considered, up to certain limits, on another financial aid form, the CSS/Financial Aid Profile, which is used by about 200 colleges for awarding their own funds.)

Also, try to pay down other forms of consumer debt, such as credit card balances and auto loans.

Bear in mind that if you sell any assets that result in capital gains, those gains could raise your income and affect your eligibility for aid.

Finally, maximize your contributions to retirement plans in the years leading up to college because those aren’t counted against you, either.

There are two other FAFSA provisions that will affect some families:

1. The simplified needs test. If parents’ adjusted gross income (AGI) is less than $50,000 and your family satisfies certain other criteria, the simplified needs test will disregard all of the assets you report on the FAFSA. To qualify, the parents must have been eligible to file an IRS Form 1040A or 1040EZ, someone in the household must have received one of several means-tested federal benefits in the last two years (such as SSI, SNAP, TANF, WIC, or the Free and Reduced Price School Lunch), or one of the parents must be a dislocated worker.
2. The asset protection allowance. This allowance shelters a portion of reportable parent assets, based on the age of the older parent. Unfortunately, the asset protection allowance has been declining since 2009-10 and will drop even further with the 2016-2017 FAFSA. For example, the asset protection allowance for a parent age 65 or older was $84,000 in 2009-10 but falls to $29,600 in 2016-17. The allowance for younger and single parents is now even lower: $18,700 for a married parent age 48 and $9,400 for a single parent age 48. The decline in the asset protection allowance primarily affects middle- and high-income families, since the assets of low-income families are usually sheltered by the simplified needs test.

Mark Kantrowitz is one of the nation’s leading student financial aid experts. He is the author of several books about paying for college, including Filing the FAFSA, Twisdoms about Paying for College, and Secrets to Winning a Scholarship, and has served as publisher of the FinAid, Fastweb, and Edvisors websites.