Income, assets can affect student financial aid planning

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By Megan Nichols

Parents often wonder how their income and assets will impact their child’s eligibility to receive financial aid.

Megan Nichols, HFG Trust
Megan Nichols,
HFG Trust

Nearly every student is eligible for some form of financial aid, even if it isn’t needs-based. Colleges use the Free Application for Federal Student Aid, or FAFSA, as well as federal tax returns, when determining eligibility for aid. The focus here is outlining the effect that income and assets — for both the parents and the (dependent) student — can have on financial aid eligibility.

Income

Colleges will assume that 50 percent of “eligible” student income and 22 percent to 47 percent of “eligible” parent income will be used to pay for college.

The FAFSA asks for financial information about the parent (and step-parent) with whom the student lived most of the time.

Some income earned by parents and their dependent student is automatically protected (not counted). Currently, the FAFSA protects dependent student income up to $6,420. For parents, the allowance depends on the number of people in the household and the number of students in college. For 2017-18, the income protection allowance for a married couple with two children, both in college, is $24,480.

Starting in 2017-18, the FAFSA will use the adjusted gross income, or AGI, reported on a tax return from two years prior to the date the student plans to enroll in college. This two-year-prior rule applies to untaxed income reported on the FAFSA as well. It has major planning implications.

If the parents’ adjusted gross income is less than $50,000 a year, a simplified FAFSA version can potentially be usedFor the non-low income households, it is important to understand what income is and is not counted under the FAFSA.

Income counted by the FAFSA includes most forms of taxed and untaxed income, including elective retirement fund contributions, money spent by non-parents on the student’s behalf, alimony/child support and disability income/workers compensation.

Income not counted in the FAFSA includes loan proceeds, grants/scholarships used for college expenses and withdrawals from 529 college savings plans.

If a grandparent wants to help pay for college, it’s typically better to give the funds to the parents, rather than to the student because this way it is not counted as income on the FAFSA.

Assets

The child’s assets count for more. Colleges will expect families to use up to 20 percent of the assets owned by a dependent student to pay for college. This is true even if the child’s assets are funded by other people’s money (such as cash gifts from family).

The parents’ assets count for less. A portion of the parents’ assets is always protected (not counted at all). The exact amount protected depends on the number of parents and the age of the older parent. For 2017-18, a married couple is allowed an allowance of $24,100 if the older parent is 55. Colleges will expect parents to use up to 5.64 percent of their “unprotected” assets toward college.

Assets excluded from the FAFSA include equity in a primary home and retirement assets including IRAs (traditional and rollover, Roth, SEP, SIMPLE) employer retirement plans (401(k), 403(b), 457), pensions, annuities (qualified and nonqualified), and cash value in life insurance.

Basically, everything else is included, such as bank accounts, taxable investments, equity in property, college savings accounts and trust funds.

A college savings account (such as a 529) that is owned by a dependent student counts as a parent’s asset.

Planning tip: If a grandparent owns a college savings account (such as a 529), it is not reported as an asset on the FAFSA. However, distributions from these accounts are treated as untaxed income to the student. This can have a severe negative impact on the student’s eligibility for need-based financial aid and, actually, is much worse than if the account were reported as a parent asset on the FAFSA.

The good news: Because income from two years prior to the year in which the student enrolls in school will be used to determine eligibility for aid, grandparent-owned assets could be used as early as the child’s sophomore year without affecting the student’s aid eligibility. Planning is crucial.

Bottom line

What are our key takeaways? First, it is almost always better to save for college in the parents’ name. Second, if the parents have a lot of assets, that doesn’t mean the student is automatically disqualified for any type of aid. Some assets (such as retirement accounts) are excluded and there is a protected amount for the parents.

Finally, be informed and seek guidance. Planning can be key.

To read more student financial aid planning visit hfgtrust.com/blog/planning-financial-aid.

About Megan Nichols:

Megan Nichols is an associate advisor with HFG Trust in Kennewick.