<p>I don't really know how FAFSA works, but you guys seem very knowledgeble. How are assets (in stocks, bonds, etc.) calculated into EFC? And also could someone explain the Asset Protection Allowance. Thanks</p>
<p>Your ECF (expected family contribution) is the sum of a portion of:</p>
<p>Student Assets
Student Income
Parent's Assets
Parent's Income</p>
<p>Because it is presumed that the parent's have other financial responsibilities, their income and assets aren't assessed as severely as the student's income and assets. For the same reason, there is an an Asset Protection Allowance applied to the parent's assets-- a dollar amount of assets they can have that won't increase the EFC. Above the Asset Protection Allowance, a % of assets is contributed to the EFC.</p>
<p>Students don't have an Asset Protection Allowance. About 35% of their assets (talking liquid assets here-- stocks, bonds, checking accounts, savings accounts, cash stuffed in the jar in the room-- but not things like car, stereo, iPod, laptop) gets added to the EFC each year. Ouch! So-- if planning for the future, try to avoid putting savings in the student's name if you have any hope of getting need-based financial aid.</p>
<p>OK-- back to the parents and the asset protection allowance. In the case of the parents, personal assets (I'll mention business assets below) include all the accounts and stuff mentioned above, plus real estate OTHER than your home (talkin' FAFSA here-- Profile is a bit different). IRA's and other retirement assets aren't included (but money contributed to such vehicles during the target year still counts as income on the FAFSA). Cars and boats and other adult toys aren't included as assets.</p>
<p>Because businesses need operating capital, the net worth of a business is assessed less severely than personal assets. So for financial aid purposes, business assets are more desireable than personal assets.</p>
<p>Once the parent's assets and are added up, an Asset Protection Allowance is calculated to see how much of the assets are protected or sheltered (not assessed for a contribution to the EFC). The protection allowance amount depends on the age of the older parent. For example, for a two parent family with the older parent between 50 and 54 years, about $50K is sheltered. Less for younger parents, more for older parents. And about half as much for a single parent.</p>
<p>Once the asset protection allowance amount is subtracted from the asset total, the remainder is assessed on a sliding scale (depending on income). Maximum assessment of parent's assets above the allowance is just under 6%. </p>
<p>The Institutional Methodology (CSS Profile) is a bit different-- primary home equity generally counts as an asset, and there's no asset protection allowance. They instead have a more modest 'emergency reserve allowance' as well as a 'low income asset allowance'.</p>
<p>Remember-- no asset protection allowance for the Student.</p>
<p>On the income side-- student non-work study income below about $2,600 is protected. Above that, it gets assessed at 35%. Beyond that, if he saves what he earns, it gets assessed at 50% (!). So a high school senior that works his butt off and makes 10K to save for college, and saves 8K of it:</p>
<ol>
<li>He'll probably pay modest state and federal income taxes.</li>
<li>If he's self employed (a fair number of kids are these days doing web-based stuff) he'll likely have to pay 15% ($1,500) to Social Security.</li>
<li>His income will increase his EFC by about $2,240 (and decrease his financial aid package by the same amount)</li>
<li>His savings will increase his EFC by about $4,000 (and decrease his financial aid package by the same amount)</li>
</ol>
<p>So-- he's to be commended for his hard work and initiative. But his financial aid planning leaves something to be desired.</p>
<p>BEFORE crunch time to file the FAFSA and Profile-- spend $15 and buy one of the good books on financial aid and learn how the formulas work, and you can legally and ethically structure your finances so as to increase your chances of getting a good financial aid offer.</p>
<p>Oops! Just noticed an error above-- the hypothetical student I mentioned above would be assessed at 50% of income and 35% of assets each year, not the other way around. Net effect is about the same, though, in this case.</p>
<p>wow. what a thorough and understandable explanation! Thanks for posting that, sblake!</p>
<p>I highly recommend reading Paying for College Withough Going Broke by Kalman Chany (Princeton Review). It is updated every year. </p>
<p>I discovered this book when our son was a sophomore but I wish I had read it earlier. One suggestion that we took to heart was the need to fully fund our IRAs every year. It also helped me decide what to do with our EE Bonds that we were planning on using for college expenses. And, it tells you step by step help to fill out the FAFSA and Profile. Well worth the money!!</p>
<p>I find that sblake, scottaa and others on this board have been extremely knowledgeable and helpful with specific questions.</p>
<p>sblake7, that is an excellent explanation.</p>
<p>FresnoMom, I also recommend the How to Pay for College without Going Broke...I checked it out of the library a couple of months ago. Our D is applying to colleges now, but we have 3 younger Ss who will overlap in college so we can learn from this process.</p>
<p>Which leads to my question regarding assets in the child's name and specifically 529 college savings accounts. As explained by sblake7, assets in the child's name are given less protection when calculating EFC. I was under the impression this referred to UGMA accounts. However, as I filled out the FAFSA and CSS Profile forms for the first time, it occurred to me that these forms seem to also treat 529 savings accounts as being "in the child's name" and, therefore, are given less protection than if we had simply put that money in a separate account in our (the parent's) names.</p>
<p>I set up a 529 college savings account for our D when she entered high school. There were three reasons I set up a 529 account: (1) we received a 10% (up to $200) annual tax credit from our state. So if I put in $2000/year, the state essentially contributed $200 of that savings; (2) the interest earned is not taxed; and (3) being in a separate college savings account, it didn't seem like it was "our" money...so when it came time to buy a car, or the home improvement, or the vacation, we didn't look to that money as being available.</p>
<p>Now that I'm looking ahead to saving for our three younger Ss, strictly from a FAFSA/CSS Profile perspective in terms of minimizing our EFC, it seems that the 529 accounts, even with the tax advantages, are not the best savings vehicle for families expecting to quality for financial aid, and that perhaps it's better to put that money into a separate savings account in the parent's name.</p>
<p>Anyone have any views on this?</p>
<p>On Google, I typed in FAFSA + 529 + plan and got these two links which might help you</p>
<p>Here is the text from my most recent newsletter regarding 529's. Please forgive me for the html tags. It was formatted for an html newsletter.</p>
<hr>
<p>Probably since the time your child was first born, you began paying attention to all the information out there about college savings plans. Some get a lot of press, others you may only hear about from an accountant. </p><p></p><p></p>
<p>As you probably already know, Im not a big fan of the most popular college savings plans being pushed out there. They seem great at first, but for the most part have created a whole host of problems that I have to fix down the line. One of the biggest parts of my business is figuring out how to solve the problems that these hyped programs create. You as the parent are certainly not to blame. Even the people who designed these programs were in the dark as to what they would cost. </p><p></p><p></p>
<p>So lets take a look some of the most popular programs out there, the 529s. Keep in mind, in 99% of all cases, the problems these plans create can be fixed. </p><p></p><p></p>
<p>529 College Savings Plans </p><p></p><p></p>
<p>These are some of the most commonly pushed plans out there today. The basic idea behind the plans is save money for college tax-free. All but Kentucky and Washington state offer 529 college savings plans. </p><p></p><p></p>
<p>If you are willing to give up the tax-free benefit on your state taxes (but keep the federal tax benefit), you can invest in the 529 plans of any state besides your own. </p><p></p><p></p>
<p>A 529 college savings plan works very similar to your 401k at work. Inside the plan, you have a limited number of mutual funds you can choose from. You invest your money in the funds and can move money in between the funds. As with a 401k, you can have money in more equity or stock type funds in your students younger years. However, you want to make sure as your student gets closer to college that you move more money out of equity funds and into more stable bond-type funds. As we all saw in years 2000 & 2001, the stock market can turn quickly and is not appropriate for short-term saving. </p><p></p><p></p>
<p>529 plans generally have higher fees and expenses than traditional savings products. This combined with generally conservative accounts and recommended savings disciplines could produce a reasonable return of 7% per year over 10 years. These 529s for financial aid purposes are considered parent assets and are penalized at 5.65%. </p><p></p><p></p>
<p>Now heres the problem with 529 college savings plans. Suppose you can save $2,000 each year for the next 10 years in a 529. At 7%, you would have approximately $28,600 for your childs college after 10 years. The tax savings on your $8,600 of growth would likely be around $1,290. But your financial aid penalty will be $1,615. So in using the 529 to gain $1,290 in tax savings you lost $1,615 in available financial aid -- a net loss of $325. </p><p></p><p></p>
<p>529 Prepaid College Tuition Plans </p><p></p><p></p>
<p>The other type of 529 is the Prepaid College Tuition Plan. 18 states offer prepaid college tuition plans. The idea behind these is to purchase tomorrows tuition at todays prices. Considering that the education cost inflation rate is almost double of what the general inflation rate is, this is not necessarily a bad idea. Many states, however, have curbed their use of prepaid plans in the last several years. They found the underlying investments they were using were not keeping up with costs. Therefore, the states themselves began losing money on these plans. </p><p></p><p></p>
<p>But what about the benefit to you? If college costs are rising on average between 5% and 8% each year, and the state is guaranteeing to keep up with that; that sounds like a pretty good deal. Unfortunately, prepaid plans receive the worst treatment under financial aid rules of any programs. </p><p></p><p></p>
<p>Lets assume again that you have saved $28,000 in a prepaid tuition plan. The prepaid plan will generally be split over four years of college, meaning you have $7,000 per year available to your student. The school that your student has applied to, is offering $7,000 per year in aid.</p>
<p>Now standard policy is to withhold financial aid until any prepaid program funds are exhausted. Which in the case above means although your student qualifies for $7,000 per year in financial help from the school, they will not see one dime. </p><p></p><p></p>
<p>This makes prepaid 529 plans the worst thing you can possibly use to save money for your childrens college. </p><p></p><p></p>
<p>Solutions </p><p></p><p></p>
<p>The most common solution I recommend for 529 college-savings plans is to just stop contributing to them. I much prefer the flexibility and lower cost indexed funds and other savings vehicles. Sure they dont have the bells and whistles of a 529, but in the long run they often turn out to be a better solution. The more traditional savings plans often prove themselves out in the last years of high school when it comes time to shelter funds and pick up that 5.65% you lost in financial aid. </p><p></p><p></p>
<p>The solution for prepaid-tuition 529s is liquidate them immediately. Yes, there will be some fees associated with withdrawing the money out of a prepaid-tuition plan; but the fees you incur will pale compared to their treatment under financial aid rules. </p><p></p><p></p>
<p>Remember as well, you can do all the work you can to lower your EFC and improve your opportunities for financial aid; but if you do not identify the schools with the generous track records, all your work will go to waste. It is a two sided coin. </p><p></p><p></p>
<p>The law and treatment of prepaid tuition plan will change as of July 1, 2006. They will now be treated just like a regular 529 plan; as a parental assest and will reduce financial aid by 5.6%</p>