Invest Cash, Avoid Fafsa: Strategies For Financial Aid Freedom

Investing your cash can be a great way to build wealth over time, but it's important to consider how these investments might impact your financial aid eligibility when it comes to filling out the Free Application for Federal Student Aid (FAFSA). The FAFSA takes into account both student and parent assets, including bank and brokerage accounts, certificates of deposit, money market accounts, and more. However, there are strategies to shelter assets on the FAFSA and reduce their impact on eligibility for need-based financial aid. These include shifting reportable assets into non-reportable assets, such as retirement accounts, using reportable assets to pay down debt, and shifting assets from the student's name to the parent's name, as student assets are assessed more heavily. Additionally, the simplified needs test will disregard all assets if the parent's adjusted gross income is less than $50,000 and the family meets certain other criteria. It's also worth noting that the number of children in college simultaneously, parents' marital status, and the generosity of the colleges a child is applying to can also impact financial aid awards.

Shift reportable assets into non-reportable assets

To maximise the financial aid you receive, you can shift reportable assets into non-reportable assets. This is because reportable assets increase the Student Aid Index (SAI) on the FAFSA, thereby reducing eligibility for need-based financial aid.

Reportable Assets

The following assets are reportable on the FAFSA:

• Bank and brokerage accounts
• Certificates of deposit (CDs)
• Money market accounts
• Restricted stock units
• Net worth of small business or farm (adjusted)
• 529 college savings plans
• Prepaid tuition plans
• Coverdell education savings accounts
• Investment real estate
• UGMA and UTMA accounts

Non-Reportable Assets

The following assets are non-reportable on the FAFSA:

• Qualified retirement plans, including 401(k), Roth 401(k), 403(b), IRA, Roth IRA, SEP, SIMPLE, Keogh, profit sharing, and pension plans
• Qualified annuities
• Family home
• Personal possessions and household goods, including clothing, furniture, electronic equipment, personal computers, appliances, cars, and boats

Shifting Reportable Assets into Non-Reportable Assets

• Increase contributions to qualified retirement plans.
• Contribute to a qualified annuity.
• Use money from reportable assets like bank accounts and mutual funds to pay down the mortgage on your home.
• Pay down other forms of consumer debt, such as credit card balances and auto loans.
• Maximise contributions to retirement plans in the years leading up to college.

Reduce reportable assets by using them to pay down debt

Reportable assets increase the Student Aid Index (SAI) on the FAFSA, thereby reducing eligibility for need-based financial aid. Therefore, it is beneficial to reduce reportable assets by using them to pay down non-reportable debt, such as credit card debt, auto loans, and mortgages. This strategy will not only make the reportable asset disappear from the perspective of the financial aid formula but also represents good financial planning sense. If you are paying a much higher interest rate on your credit cards than you are earning on your bank account, you will save money by paying off the high-rate debt since you will be paying less interest.

It is important to note that loan proceeds count as an asset if they remain unspent on the date the FAFSA is filed. Therefore, it is advisable to use the funds to pay down debt before the FAFSA is filed. Additionally, only loans that are secured by a reportable asset are treated as reducing the net worth of the asset. For example, if a family uses a home equity loan on the family home to buy a second home, the loan reduces the net worth of the family home, not the second home.

Furthermore, paying down debt can also include accelerating necessary expenses. For instance, it is advisable to replace the roof on the family home or purchase a new car before filing the FAFSA rather than afterward. These necessary expenses may include maintenance items or replacing equipment that is nearing the end of its useful life. By spending the money on these expenses before filing the FAFSA, you can reduce your reportable assets and increase your eligibility for need-based financial aid.

Shift reportable assets from the student’s name to the parent’s name

When it comes to the Free Application for Federal Student Aid (FAFSA), student and parent assets are counted differently. Student assets have a greater impact on a family's eligibility for financial aid than parent assets. Colleges expect families to contribute up to 20% of the assets owned by a dependent student to pay for college, while for parents, this figure is up to 5.64%. Therefore, shifting reportable assets from the student's name to the parent's name can be a strategy to increase eligibility for need-based financial aid.

• Timing is crucial: The FAFSA requires applicants to report their assets as of the date the application is filed. This means you can make changes to your assets up until the date of filing. However, if you make last-minute changes, be sure to document the updated asset value by printing it from the account's website.
• Understand reportable and non-reportable assets: Certain assets are reportable on the FAFSA, while others are not. Reportable assets include bank and brokerage accounts, certificates of deposit (CDs), money market accounts, restricted stock units, net worth of small businesses or farms, 529 college savings plans, prepaid tuition plans, Coverdell education savings accounts, investment real estate, UGMA and UTMA accounts, and more. Non-reportable assets include qualified retirement plans, the family home, personal possessions, and household goods.
• Convert reportable assets into non-reportable assets: If possible, convert reportable assets into non-reportable assets. For example, you can increase contributions to qualified retirement plans or make contributions to a qualified annuity.
• Use reportable assets to pay off debt: Reportable assets can be used to pay down non-reportable debt, such as credit card debt and auto loans. This strategy not only reduces reportable assets but also makes financial sense if you are paying high-interest rates on your debt.
• Shift assets to a custodial 529 plan: If the student is a dependent, moving money from a UGMA or UTMA account into a custodial 529 plan will cause it to be reported as a parent asset on the FAFSA, reducing the assessment rate and increasing aid eligibility.
• Spend the student's assets strategically: If possible, spend the student's assets on necessary expenses for their benefit before filing the FAFSA. This could include purchasing a computer or car for college. Even if you cannot shift all assets to the parent's name, spending down the student's assets first can help preserve the parent's assets.
• Consult a financial advisor: Before making any decisions, be sure to consult a financial advisor. Shifting assets can have substantial consequences on financial aid and taxes, so it is important to understand the full implications.

Reduce income during the base year

The "base year" is the tax year prior to the award year, where the award year is the academic year for which aid is requested. The need analysis process uses financial information from the base year to estimate the expected family contribution. Here are some strategies to reduce income during the base year:

Take an unpaid leave of absence

If you are employed, consider taking an unpaid leave of absence during the base year. This will reduce your income for that year, which can increase your eligibility for need-based financial aid.

Incur a capital loss by selling off bad investments

If you have any bad investments, consider selling them off during the base year to incur a capital loss. This will lower your income for that year and may increase your eligibility for financial aid.

Postpone any bonuses until after the base year

If you are expecting to receive any bonuses, try to postpone them until after the base year. Bonuses can increase your income and reduce your eligibility for need-based financial aid.

Reduce salaries for family members

If your family runs its own business, consider reducing the salaries of family members during the base year. The income retained by the corporation will still be considered a business or investment asset, which is treated more favorably than income.

Make larger contributions to retirement funds

Consider increasing your contributions to retirement funds during the years leading up to college. This will reduce your reportable income and increase your eligibility for need-based financial aid.

Defer income and increase deductions if self-employed or a business owner

If you are self-employed or a business owner, consider deferring income and increasing deductions during the base year. This will lower your taxable income and may increase your eligibility for financial aid.

Care for a loved one using Family Medical Leave Act (FMLA) protections

If you need to take time off work to care for a loved one, consider using Family Medical Leave Act (FMLA) protections. This can help you reduce your income during the base year and increase your eligibility for financial aid.

Postpone remarriage

If you are considering remarriage, postponing it can impact your financial aid eligibility. Your significant other's income is not required on the FAFSA unless you are married.

Have your child live with the lower-earning parent

If you are divorced from your child's other parent, consider having your child live with the lower-earning parent. As of the 2024/2025 updates to FAFSA, having your child live with the higher-earning parent will no longer affect the Student Aid Index (SAI).

See if your student qualifies for independent status

If your student qualifies for independent status, the FAFSA will not factor in parental income and assets. This can increase their eligibility for need-based financial aid.

Increase the number of family members enrolled in college

Increasing the number of family members enrolled in college is a strategy that can be used to maximize your eligibility for need-based student financial aid. This strategy is based on a loophole in the need analysis methodology and is completely legal.

The need analysis process uses financial information from the base year (the tax year prior to the award year) to estimate the expected family contribution. The family contribution is then split among all children enrolled in college.

For example, suppose the need analysis formula calculates a parent contribution of $17,000 when one student is in school and a student contribution of $2,000. With college expenses of $19,000 a year, the student will have a financial need of $2,000 and will probably not be eligible for much financial aid. But next year, when the student's sibling is also enrolled, the parent contribution is split in half. Even though the parent contribution has increased slightly, to $18,000, each student is now expected to receive $9,000 from their parents. With college expenses of $21,000 and a student contribution of $2,000, each student now has a financial need of $10,000, and both will be eligible for some financial aid.

It is important to note that this strategy may not always result in an increase in financial aid. The impact depends on the specific financial situation of the family and whether the students are Pell-eligible. Additionally, under the new formula, known as the Student Aid Index, the division of the expected family contribution between enrolled family members is no longer applicable.

If you are considering this strategy, it is recommended to seek professional advice and carefully review the latest updates to the FAFSA guidelines.

Frequently asked questions