Does a 529 plan impact financial aid, including FAFSA?
To maximize your financial aid package, it’s important to learn which assets and debts are reported on the FAFSA. The higher your total reported assets, the higher your EFC and the lower your financial aid package will be. Luckily, only some assets are reported on the FAFSA. Some assets must be reported, but will only reduce your aid by a percentage of their value. So, if you distribute your money strategically before submitting the form, you may receive more financial aid.
Here’s our guide about which assets are reported on the FAFSA, and how much each asset affects your aid. We’ll explain how you can move your money around in order to minimize your reportable assets. But first, we’ll go over the Simplified Needs Test, which could exempt you from reporting any assets at all.
Simplified Needs Test
If your family qualifies for the Simplified Needs Test, you will be exempt from reporting any assets. That means you won’t have to worry about moving money around, or how your assets will affect your aid. To qualify for the Simplified Needs Test, your parents’ adjusted gross income must be under $50,000. Additionally, they must be eligible to file a simplified tax return. Simplified tax returns are filed using the IRS Form 1040A or 1040EZ.
List of reportable assets
All of the following assets may need to be reported on the FAFSA. However, some must only be reported if they exceed a certain value. Others only require a percentage of their value to be reported.
- Stocks, bonds, hedge funds, ETFs, stock options, money market accounts, and mutual funds – All of these financial investments must be reported on the FAFSA.
- Bank and brokerage accounts – These include checking and savings accounts, as well as investment accounts.
- Cash – If you have a significant amount of money saved in cash, it may impact your FAFSA results.
- 529 Plans – Some 529 Plans must be reported on the FAFSA. However, this can depend on a variety of factors. These include account balance, account ownership, and more. Read the section below to find out how your 529 Plan could impact financial aid.
- Trust funds – Trust funds set up for the student or the parents must be reported.
- Investment real estate – Real estate other than the family’s primary residential home must be reported.
- Prepaid tuition plans – Prepaid tuition plans reduce your financial aid by 20% of their value.
List of exempt assets
The following assets do not need to be reported on the FAFSA. But before you omit them, make sure to double-check that you meet the requirements.
- Residential home – The primary home in which your family resides does not need to be reported as a FAFSA asset. However, if your family owns a rental home, it must be reported. The same is true of any real estate property that generates revenue.
- Retirement plans – 401[k] plans, pension funds, annuities, non-education IRAs, and Keogh plans are all exempt from the FAFSA.
- Personal possessions, including vehicles – Your personal possessions do not need to be reported as debts. This includes expensive jewelry, electronics, boats, and cars. If you have a large auto loan, consider taking money out of a reportable asset to help pay it off. This can reduce your total reportable assets.
- Small businesses – If your family owns a small business, you won’t need to report it on the FAFSA. Small businesses are defined as businesses with under 100 full-time employees.
529 Plan and FAFSA
In several situations, there is not a requirement to report your 529 Plan as an asset on the FAFSA. If your account balance falls below your Asset Protection Balance, you will not have to report the account. This balance is typically around $10,000. Additionally, if your grandparents are the owners of the 529 Plan account, you will not have to report it on the FAFSA no matter the balance.
Related: 529 Plans and the FAFSA: Does a 529 Plan impact financial aid?
How does debt affect the FAFSA?
You may be wondering if your debt could have a positive impact on your or your child’s financial aid. This could include consumer debt, educational debt, or business debt. Unfortunately, the FAFSA does not take your debt into account. You won’t receive a more favorable financial aid package due to your level of debt.
However, you can use debt to your advantage. Parents or students can put savings money towards their debt to reduce reportable assets. Using this strategy will reduce the amount you owe overall, and reduce the amount you report on your FAFSA.
Protecting your assets
Paying down debts
One of the best ways to reduce your reportable assets is to pay down debts. It’s important to keep some savings for a rainy day, so don’t empty your savings account. But let’s imagine you have substantial savings and owe money on your car, home, or education loans. It could be a good idea to pay down your loans in order to maximize your financial aid. This reduces your reportable assets while paying down future debts.
Read more: Paying off student debts early
Moving money around
There are many ways to move your money around in order to convert it from reportable to non-reportable assets. You can increase contributions to your retirement account, which is non-reportable. You can also purchase items that your student will need for school. If they will need a car or a computer for college, consider buying it before you submit your FAFSA. By doing this, you’ll reduce your reportable assets.
But in many situations, reporting your assets on the FAFSA is unavoidable. However, you do have control over what type of account these assets are in. Shifting the money between different accounts can improve your financial aid package drastically. For example, money in a 529 Plan account only reduces your financial aid by 5.64% of the balance. Shifting money from a savings account into a 529 Plan can reduce your reported assets significantly.
Furthermore, ownership of your assets can determine what percentage is reportable. Students’ assets are reported at a higher percentage than their parents’. You can consider shifting any of the students’ assets, such as college funds from grandparents, into their parents’ names. Even though you’ll report the same amount of assets, you won’t be penalized as harshly for them.
Read more: How to complete this year’s FAFSA
Don’t forget the CSS Profile
Remember that this guide only applies to the FAFSA. The FAFSA determines federal and state aid, as well as institutional aid at many schools. But some schools utilize the CSS Profile to determine institutional aid. The CSS Profile takes into account a broader array of family assets. If you are seeking institutional aid at a CSS Profile school, you may need to utilize alternate strategies.
Good luck in your FAFSA application process! With these tips in mind, you’ll be able to maintain your assets while maximizing your financial aid package.