The Myth of Asset Sheltering and Financial Aid.
Excerpts from Lynn O'Shaughnessy • February 01, 2018
Attention all parents and grandparents: contrary to many parents’ belief, assets will not jeopardize their children’s chances for financial aid for the vast majority of families. Many parents with college-bound kids believe that hiding assets is the best way to boost their chances for financial aid. But it isn’t. In fact, the major factors that impact financial aid awards include:
Parental income and marital status
Number of children in college simultaneously and the generosity of the college
While some types of assets will count in financial aid calculations, many won’t. For the vast majority of families, assets will not jeopardize their chances for financial aid. One reason why assets don’t hurt financial aid for most households is because the aid formulas shelter significant asset sources. For one, aid formulas don’t consider qualified retirement accounts and most parents have the majority of their money invested in qualified retirement accounts that include:
Traditional Individual Retirement Accounts including ROTHS, SEPS, 401ks and other self-employed plans.
Parents could have $1 million in their retirement accounts, and that money wouldn’t hurt the applicant’s eligibility for need-based aid!!!
More than 99 percent of public universities in this country use the FAFSA to determine eligibility to financial aid. Slightly more than 200 colleges (nearly all private) also use the CSS Profile, mostly the elite private institutions, such as the Ivy League schools, which primarily educate wealthy students.
Yet another major asset that FAFSA-only colleges and universities ignore is the equity in a primary home: the equity wouldn’t impact financial aid either.
What the FAFSA and CSS Profile formulas do care about are assets outside of retirement accounts. Among the assets that are assessed for financial-aid purposes are:
Taxable brokerage accounts
Savings and checking accounts
Certificates of deposit
529 plans and Coverdell’s
Equity in investment properties
For every $10,000 that parents have in college accounts or other nonretirement assets, the eligibility for financial aid drops by just $564. The financial aid hit for non-retirement assets, however, is even less than that because both the FAFSA and the CSS Profile formulas automatically shelter some of these relevant assets.
Here’s an example of how little assets can impact aid. Let’s assume that the oldest parent’s age by Dec. 31 is 50. (The formula only cares about the oldest parent’s age.) The married couple has saved $100,000 for college. With the asset protection, the eligibility for financial aid purposes would only drop by $4,382.
Surely, you would rather have $100,000 saved for college than have nothing except the possibility of getting $4,382 in need-based aid. And this aid is likely to be in the form of loans.
Some “professionals” who focus on college planning seem to believe that parents should hide their assets in annuities and life insurance to qualify for financial aid. These are often expensive options and are usually unnecessary.
In addition, many colleges don’t provide good need-based aid. So even if parents went to the trouble of tying up their money in products that they don’t need, they could end up without a better package. And they risk not having liquid assets to pay for college.
Why does this matter to YOU? Attempting to shelter assets could be costly and ineffective. Investing in growth is the best solution for funding your kid’s and grandkid’s education!