Questions on how options are treated in FAFSA and Profile

Paying for College
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<p>My son will enter college in 2011. I have two options which will expire in 2011 and 2012. Our financial adviser suggested we exercise these two options now to minimize the impact on the financial aids calculations in 2011 and 2012. Here are my questions: </p>

<p>1) When options are exercised, will they be treated as family income?</p>

<p>2) How is family income treated differently from family asset? Our financial adviser said the family income can be calculated at 40% in EFC, is it really true? </p>

<p>3) How do colleges treat these sorts of one off situations? I mean these options are one time circumstances which are not regular family income. </p>

<p>4) Based on your opinion, do you think exercising these two options now a good advice?</p>

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<p>

Yes that is true. There is a sliding scale in the FAFSA EFC formula. At the high end of income (which is not very high, about $60k after all protected income allowances and allowances for taxes/FICA etc) 47% of income over that amount goes to the EFC. If your income is high enough to be in the 47% area then as far as federal aid is concerned you would probably not qualify for much other than loans. Federal grant aid requires a very low EFC (currently <4617 for the Pell grant).</p>

<p>For parent assets the maximum that goes to the FAFSA EFC is 5.6%.</p>

<p>I believe exercising options would be treated as income. There are tax consequences to exercising options but the depend on the type of option. One type would be a taxable event in the year you exercise the option so would be on your tax return that you use for FAFSA. The other type I think would not affect taxes till you sell the stock but I think they would probably be counted as other untaxed income by FAFSA in the year you get them even if you do not owe taxes on them that year. I am not entirely sure of that though. Hopefully Kelsom will see this and chime in.</p>

<p>One off income events would affect the EFC in the year they are reported as income on the FAFSA. So if they were income in the 2009 tax year then they would affect the EFC in the 2010-2011 school year. If they were income in 2010 tax year they would affect the EFC in the 2011-2012 tax year. Even though they are one off events they will still be counted as income because you had the income so it is considered available for school expenses for the year. As assets they will impact the EFC long as you hold them as assets. </p>

<p>The above is all for FAFSA. I don’t know about CSS except that I believe they look at the previous 2 years tax returns for their institutional aid purposes.</p>

<p>I am not knowledgeable about tax treatment of options. From quick research on it there appear to be 2 types of options. For non qualified options you owe tax in the year you exercise the options on the spread. So if the option allows you to buy the share for $10 and the stock is valued at $15 then you owe tax on the $5. So the $5 would be income in that tax year. The other type is Incentive options. The tax treatment is different and you don’t pay tax when you exercise the options but when you sell the stock. Then there was some stuff about having to sell within a certain time period for one type of tax treatment as opposed to another. As I said, I am not knowledgeable about this tax area so you should probably investigate this.</p>

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<p>I suggested this query be posted here…here is the response I posted elsewhere…I hope others chime in (and correct me where I’m wrong!!)</p>

<p>Parental assets are assessed at 5.6% but there is some asset protection. Student assets are assessed…at (I believe) 20%. So…don’t put the assets in your kid’s names.</p>

<p>For the FAFSA…the expected family contribution is typically between 25% and 33% of your adjusted GROSS income. So…as an example, if your income is $100.000 in a year (and I believe those “options” would be included in your income for the year in which they are cashed out)…your expected family contribution per the FAFSA (EFC) would be somewhere between $25,000 and $33,000 for that year. </p>

<p>If your child is starting college in 2011, the 2010 tax year will be the information used for the FAFSA and if necessary the PROFILE…for that year. If you take those options, I think they will be counted as INCOME (check with your financial guy on that)…they will also be considered as assets if they lie in a savings, CD or similar type of account for the year of reporting for your kiddo for financial aid.</p>

<p>Re: your fourth question…the one about “one time” situations. You ARE getting this money. The schools are not going to “ignore this” because it is a one time occurance. For THAT year", the money will counted. The assumption is that college costs will be paid out of past earnings (savings…and perhaps things like these options), current earnings (income…and maybe these options would fall here), AND future earnings (loans). </p>

<p>One other thing to look at is what the colleges will be asking for as financial aid application materials. Some schools ask for tax returns for the tax year of the FAFSA/Profile (in this case 2010). BUT some schools will want TWO years of returns. In other words, if you cash out in 2009, some schools would STILL see that extra income because they would see your tax returns from 2009. </p>

<p>You haven’t provided too much info so I’m not sure what “impact” on financial aid means to you. This would certainly vary depending on the school’s financial aid policies for need based aid. For FAFSA, your EFC would need to be less than $5000 to qualify for the “free money” federal aid…Pell grant, etc. </p>

<p>Most schools awarding very generous financial aid to folks with incomes in excess of $120,000 a year…also require the CSS Profile…but that is a whole other discussion.</p>

<p>If you want to exercise these options, you should feel fortunate that you have them. Perhaps you can plan to use some of this to help your kiddo with college costs.</p>