Financial aid is a valuable resource for students and their families. And sending a child off to college is one of life’s biggest (and often most expensive!) events. Unfortunately, certain assets may adversely affect student financial aid eligibility. That’s why careful financial planning is particularly important for families with college-age children.
Federal financial aid eligibility is calculated using many variables including parental income and assets and the your child’s income and assets, as some of the most significant. Income and assets attributed to the child (rather than you as the parent) will increase the EFC, or Expected Family Contribution.
The EFC is a measure of the family’s ability to pay for college. But strategic financial planning can help you save funds for college without increasing your EFC and reducing your child’s financial aid eligibility. Let’s look at the ways some common assets affect financial aid eligibility.
401(k)s, and Roth and traditional IRAs are not used to determine your EFC. However, funds withdrawn from these accounts, even if not used for college expenses, are counted as income and thus can affect your EFC.
Federal financial aid calculations do not include equity in the parent’s primary residence. Individual institutions, however, may include equity when determining aid eligibility.
These can be considered either the parent’s or the student’s asset, depending on how the account is titled and who is named as beneficiary.
Family Owned Businesses
The value of small family owned businesses is not included in the federal aid calculation if at least 50% is owned and controlled by the family, and it has less than 100 employees.
Life Insurance Policies and Annuities
The cash values of these assets are not included in the federal aid calculation.
The value of mutual funds is considered an asset, while distributions and capital gains are considered income. This is an important distinction because the portion of income that can be included in the federal aid calculation is much more than the portion of assets that can be included.
529 Savings Accounts and Coverdell ESAs
These are typically considered parental assets. Withdrawals are not included unless coming from a third-party account, such as that of a grandparent.
As you can see, planning for college requires consideration of many factors, such as which assets affect financial aid and how they do so. You can maximize your student’s financial aid eligibility, however, by developing a financial plan that will allow you to take advantage of asset exclusions when filing the FAFSA.
To do this, consult with us as your Personal Family Lawyer® about your financial resources and financial needs when it comes to college. We can help your family accommodate the costs of higher education by taking advantage of the ways in which you can minimize your EFC while still preserving assets.