Loans, Assets, And Fafsa: What You Need To Know

The Free Application for Federal Student Aid (FAFSA) is a daunting process for many students and their families, as it requires a lot of personal and financial information. One of the most important aspects of the FAFSA is reporting assets, which are used to calculate the Student Aid Index (SAI) and determine eligibility for need-based federal aid. While the FAFSA does not consider all funds or assets equally, it is important to know what counts as an asset and what doesn't to avoid costly errors in financial aid. So, do loans count as assets for FAFSA?

Student assets vs. parent assets

The FAFSA (Free Application for Federal Student Aid) asks about income and assets. However, certain types of assets are not reported on the FAFSA. The FAFSA considers students' assets and parents' assets differently.

Student Assets

Student-owned assets can have a greater impact on financial aid eligibility than parents' assets. Students are generally expected to contribute a higher proportion of their assets, up to 20%, to pay for their college education. This includes any money that the student has readily available, such as money in a checking or savings account, or anything that holds value and can provide financial benefits in the future, such as stocks or property.

Parent Assets

Parental assets may have some impact on financial aid eligibility, depending on the type of asset. However, they generally have a more limited impact because parents are expected to contribute a smaller proportion of their wealth, up to 5.64%, to pay for their child's college education. The FAFSA formula protects a portion of parents' non-retirement assets, so these may have an even lesser impact.

Assets to Declare on FAFSA

• Cash assets: All the money currently available in savings and checking accounts.
• Real estate: Any property besides the principal residence.
• Businesses: The net worth of any businesses owned, including investment farms.
• Investments: The current net worth of investments, including stocks, bonds, mutual funds, certificates of deposit, and non-education IRAs.
• Retirement accounts: The FAFSA does not ask about the value of retirement accounts, but untaxed contributions and withdrawals from these accounts must be reported as income.

Assets Not Included on FAFSA

• Primary residence: The home that is your principal residence is not considered an asset.
• UGMA/UTMA accounts: If the parents are custodians but not owners, these do not need to be reported.
• Life insurance: The funds in a life insurance policy are not considered an asset.
• ABLE accounts: These state-run savings programs for individuals with disabilities are not reported on the FAFSA.
• Retirement savings accounts: These include 401(k) plans, pension funds, annuities, and non-education IRAs.

It is important to note that not all funds are treated equally when it comes to FAFSA, and it is crucial to be accurate when declaring assets to maximize financial aid eligibility.

What is considered an asset?

When you complete the Free Application for Federal Student Aid (FAFSA), you will be asked to report information about your and your family's assets. The assets that you and your family own can affect your Student Aid Index (SAI), which colleges use to determine how much financial aid you are eligible for. An asset is essentially any money that you have readily available, such as money in a savings or checking account, or something that can provide financial benefits in the future, such as property or stocks.

It is important to be as accurate as possible when completing the FAFSA. You will need to include documentation with the application, so gathering as much information as possible beforehand can help you fill out the application seamlessly and quickly. It is also important not to declare unnecessary assets on your FAFSA form, as this error could cost you dearly in financial aid. Knowing which assets are counted by FAFSA and which are not may also allow you to shelter your assets to maximize financial aid eligibility.

The FAFSA is very specific about what is considered an asset and what isn't. For example, the home that is your principal residence is not considered an asset, but any other real estate that is owned will be assessed. Other investments that must be included on the FAFSA are real estate (other than the primary residence), UGMA (Uniform Gifts to Minors Act), UTMA (Uniform Transfers to Minors Act), stocks, bonds, certificates of deposit, etc. Retirement savings accounts, including 401(k) plans, pension funds, annuities, non-education IRAs, and Keogh plans, are also considered assets on the FAFSA.

On the FAFSA, net worth cannot be negative; it can only be recorded as 0, even if the asset has negative worth. If your or your parents' net worth is significant or complex, consider consulting a financial professional to assess the most strategic way to handle your assets.

How to report assets

When completing the Free Application for Federal Student Aid (FAFSA), you will be asked to report information about your and your family's assets. The assets that you and your family own can affect your Student Aid Index (SAI), which colleges use to determine how much financial aid you are eligible for. An asset is essentially any money that you have readily available (such as money in a savings or checking account) or something that can provide financial benefits in the future, such as property or stocks.

You and your parents will report certain assets on the FAFSA, backing up any claims with paperwork. These asset records are then used as part of the calculation for your SAI (previously EFC), which determines how much need-based federal aid you’re eligible for. It's important to be as accurate as possible when completing the FAFSA.

Not all assets must be reported to determine your SAI. For example, if a dependent student’s parents, or an independent student and their spouse, have a combined income of $60,000 or less, their assets will not be considered in the FAFSA formula. Similarly, if anyone in the student’s household qualifies for means-tested federal benefits, assets do not need to be reported.

Additionally, the FAFSA does not ask about the value of retirement accounts, such as traditional and Roth IRAs, 401(k) plans, and pensions. However, the untaxed contributions to and withdrawals from these accounts must be reported on the FAFSA as income.

On the FAFSA, you’ll be filling out the net worth of your assets, with bank information provided as backup. The net worth of an asset is calculated by subtracting any debt owed on the asset from the asset itself. For example, if your parents own a rental property valued at $400,000 but owe $300,000 on the property, the net worth of the property would be $100,000. On the FAFSA, net worth cannot be negative; it can only be recorded as 0, even if the asset has negative worth. If your or your parents’ net worth is significant or complex, consider consulting a financial professional to assess the most strategic way to handle your assets.

You can prepare your financial information before the FAFSA application is available on October 1. Since you’ll need to include documentation with the FAFSA application, downloading and printing any statements now can pay off in terms of less paperwork later.

How assets impact financial aid

When it comes to applying for financial aid, it's important to understand how your assets will impact the amount of aid you're eligible to receive. Colleges and universities use the information provided on your Free Application for Federal Student Aid (FAFSA) and federal tax return to calculate your Expected Family Contribution (EFC) or Student Aid Index (SAI). The SAI determines your eligibility for need-based federal aid. However, it's important to note that not all funds are treated equally, and certain types of assets may not need to be reported on the FAFSA.

Both parent and student-owned assets can impact financial aid eligibility. However, student assets typically have a greater impact, as students are expected to contribute a higher proportion of their assets (up to 20%) to pay for their college education. On the other hand, parents are expected to contribute a smaller percentage (up to 5.64%) of their unprotected assets. Additionally, the FAFSA formula protects a portion of parents' non-retirement assets, further reducing their impact on financial aid eligibility.

The types of assets that are considered on the FAFSA include cash savings, stocks, bonds, certificates of deposit, and real estate investments (excluding the primary residence). Retirement savings accounts, such as 401(k) and Roth IRA accounts, are generally not counted when determining the SAI. However, withdrawals from Roth IRA accounts will be counted as untaxed income on the FAFSA. It's important to carefully review the FAFSA requirements and consult a financial professional if needed to ensure accurate reporting of assets.

Additionally, there are special considerations for families with lower incomes. If a family's income falls below a certain threshold, they may qualify for the Simplified Needs Test, which disregards all assets. For families who don't qualify for this test, an asset protection allowance may be available, based on the age of the older parent. It's important to note that any monetary gifts received, such as from grandparents, should be reported as untaxed student income on the following year's aid applications.

What is the Student Aid Index (SAI)

The Student Aid Index (SAI) is a number used to determine financial aid need eligibility for the cost of attendance at colleges, universities, and qualifying career training programs. The SAI is calculated using the asset information provided on the FAFSA (Free Application for Federal Student Aid) form. This includes details of income and assets, such as cash, stocks, and real estate. The higher the SAI, the more likely it is that the family will be expected to contribute to the cost of the student's post-secondary education expenses.

The SAI is used by the financial aid office at a college or career school to determine how much federal student aid a student would receive if they attended that institution. The SAI is subtracted from the total Pell Grant offering, which is just over $7,000, to determine the amount of financial aid a student is eligible for. The Federal Student Aid Estimator can help prospective students understand their eligibility for federal student aid and estimate their SAI before completing the FAFSA.

The FAFSA form requires a lot of personal and financial information from both parents and students. It is important to be as accurate as possible when completing the form. The FAFSA asks about income as well as assets, however, certain types of assets are not reported, and not all funds are treated equally when it comes to determining financial aid eligibility. For example, the principal residence is not considered an asset, but other real estate that is owned will be assessed. Similarly, while retirement savings accounts like 401(k) and Roth IRA accounts are reported, they are considered protected assets and do not impact financial aid eligibility.

The Simplified Needs Test makes it easier for families below a certain income threshold to complete the FAFSA. If they fall below this threshold, they do not need to answer questions about parent or student assets.

Frequently asked questions