College Financial Aid

Joseph Kubic |

Parents with substantial investments and home equity generally find it harder to get financial aid for their college-bound children. But if you understand how assets are assessed on both the FAFSA and CSS Financial Aid PROFILE, you can improve your chances for getting the best financial aid package possible.

Do you know how your investments might reduce their chances for financial aid?

And what about the role that a family’s home equity may play in determining whether a student will receive financial help from a college?

When children are little, parents often feel virtuous about saving for college, but when the college years are approaching, they too often begin viewing their college accounts and other investments as if they were time bombs with short fuses. Parents frequently assume that their assets will wreck their chances for financial aid. Fortunately, parental fears about their investments are usually worse than reality. It’s our job to explain the real story behind the role that assets play in your financial aid determinations.

Assets and financial aid applications

Whether your assets will hurt your financial aid prospects depends in part on what financial aid application(s) each school uses.

There are the two main applications:

  • The free application for Federal Student Aid (FAFSA). All colleges and universities use the Free Application for Federal Student Aid (FAFSA) to determine if a student qualifies for federal and/or state financial aid.

Most schools also use FAFSA to decide if a student qualifies for financial help from their own institutions. Nearly all public institutions and many private colleges find it sufficient to rely solely on the FAFSA.

  • CSS/Financial Aid PROFILE. Roughly 260 colleges and universities (nearly all of them private) require families seeking financial aid to complete an additional aid application called the CSS/Financial Aid PROFILE. Highly selective schools, such as the Ivy League, Stanford, MIT, and Amherst, use the PROFILE.

These schools depend upon the PROFILE, which is a creation of the College Board, to decide who will get help from their own in-house pools of institutional money.

How FAFSA treats assets

Let’s first take a look at how assets fare under the FAFSA aid calculations. Many will be pleasantly surprised that with the FAFSA, their investments make little or no impact on their children’s chances for need-based help. That’s because FAFSA ignores some assets, including the two biggest for many families: home equity and qualified retirement accounts.

Here are the assets that FAFSA ignores and parents do not need to include in their application:

  • Equity in a primary home
  • Qualified retirement assets including:
    • Traditional and rollover IRAs
    • Roth IRAs
    • SEP-IRAs
    • 401(k), 403(b), 457(b)
    • SIMPLE
    • KEOGH
    • Pension plans
    • Annuities (qualified and nonqualified)
    • Cash value in life insurance

The FAFSA directions aren’t as clear as they could be, so some families mistakenly include their retirement accounts, which, depending on their size, can kill their chance for financial aid.

While retirement accounts are safe, other assets are not. The following are those assets FAFSA does assess in determining eligibility for financial aid:

  • All taxable accounts including:
    • Stocks
    • Bonds
    • Mutual funds
    • Certificates of deposit
    • Savings and checking accounts
    • Commodities
    • Equity in property other than primary residence
  • College Accounts
    • 529 college plans
    • Coverdell Education Savings Accounts
  • UGMA/UTMA custodial accounts (considered children’s assets)

How parents’ vs. children’s assets are assessed

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%. The federal formula treats child assets more harshly because students are expected to contribute more of their money to pay for their college years.

Let’s look at a couple of examples on how the children’s versus the parents’ assets come into play when calculating financial aid.

Child’s Assets

Savings account  




Total assets


In this example, the child’s assets ($50,400) are assessed at the FAFSA rate of 20%. The child’s eligibility for need-based aid drops by $10,080, which is a significant hit.

For financial aid purposes, it’s better to have money held in the parents’ names rather than the child’s. However, the child assets shouldn’t pose a problem if a family isn’t going to qualify for need-based aid because of high parental assets and income. Wealthy clients will want to look for schools that provide merit scholarships for high-income students—and luckily most do.


 Parents’ Total Assets 

 Assets in FAFSA Formula 

Home equity









Roth IRA



Variable annuity



529 college account



Mutual funds taxable account  



Cash in bank account



Total investments



While this hypothetical couple has $552,000 in assets, the FAFSA formula only considers a fraction of the investments when calculating aid eligibility. To see what impact the FAFSA formula assets would have on aid eligibility, multiply the amount by 5.64%. It would appear that this family’s eligibility for financial aid would drop by $5,922, but the federal formula has one more step.

Parents’ education savings and asset protection allowance

The financial aid hit in this hypothetical example ($5,922) would actually be lower because the FAFSA formula automatically shelters a portion of the parents’ nonretirement assets.

Just how much clients can shield will depend on the age of the oldest parent as of the last day of the most recent calendar year. The closer the oldest parent is to retirement age, the more the family can shelter.

A couple in which the oldest parent is 50 years old, for instance, could shelter $31,800 in taxable assets based on the current formula.

The U.S. Department of Education releases the formula every year in its annual publication entitled “The EFC (Expected Family Contribution) Formula.” The asset protection table is on page 19 of The EFC Formula, 2015-2016. So you can be assured that not all of your taxable assets will hurt your aid chances.

Low income but higher assets

FAFSA also allows parents with a low enough income to avoid divulging any of their assets through something called a “simplified means test.” If the parents’ adjusted gross income is less than $50,000 a year and the parents were eligible to file IRS Form 1040A or 1040 EZ, they should not include their assets on the FAFSA.

Because the FAFSA formula only considers taxable and college assets when determining aid eligibility, the financial aid impact often won’t be as punitive as parents assume. In fact, it may not be an issue at all. It is always smart to save for college.

How CSS/Financial Aid PROFILE treats assets


Schools that use the PROFILE delve deeper into a family’s finances, so this aid application will include significantly more questions. In fact, schools that use the PROFILE can select from hundreds of different supplemental questions.

What the PROFILE ignores:

  • Qualified retirement accounts (see list above in FASFA section)
  • Qualified annuities
  • Life insurance cash value (although some PROFILE schools will inquire about the cash value of life insurance.)

The PROFILE does ask about the family’s retirement assets, but it’s considered rare for a school to use those assets in the aid calculations. However, the PROFILE does consider the following assets:

  • Equity in primary home
  • Taxable accounts
  • Custodial accounts
  • Nonqualified annuities
  • Equity in investment property
  • Assets in family business or farm

In conclusion

Understand the variability in how you and your children’s assets will be considered, depending on what school is in question. It’s something not many are aware of—especially if they are sending off their first student. The situation may not be as difficult as you fear, and different institutions may offer significantly different levels of help. That’s something to consider when making the choice about best overall school.



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