Parents with significant assets may find it difficult to help children pay for college. College costs are out of control and if parents spend their own money, they risk not having enough for retirement and old age. On the other hand, the more money they have, the less their child may get in financial aid. That's why it's critical for parents to understand how their financial situation affects their child's financial aid package so they can take steps to improve their chances of receiving assistance.
Some parents mistakenly don't save money so their child can get more aid, but often that is bad strategy because they won't get enough aid to replace the savings and both parents and children are left with trying to make up the difference. The reality is that many assets are not included in the financial aid determination and even when they are included, it is only a small percentage.
The first step for parents is understanding how assets are treated under the FAFSA and CSS/Financial Aid PROFILE.
All colleges and universities use the Free Application for Federal Student Aid (FAFSA) to determine if a student qualifies for federal and/or state financial aid. Most schools also use FAFSA to decide if a student qualifies for financial help from their own institutions.
Some colleges and universities also use the CSS/Financial Aid PROFILE to decide if a student qualifies for financial help from the school.
FAFSA does not count as assets the equity in your home, 401k and IRA accounts, pensions, annuities and life insurance cash value. However, other savings and investment accounts and equity in other property are included as available assets. Relevant parent assets are assessed at a maximum of 5.64%, while child assets are assessed at 20% in determining whether a child qualifies for financial aid.
The CSS/Financial Aid PROFILE doesn't include qualified retirement plans, qualified annuities and life insurance cash value in the financial aid calculation, but does include home equity, taxable and investment accounts and other assets. Parental assets are assessed at 5% and child assets at 25%.
These provisions open up the possibility for parents to structure their savings to maximize their child's opportunity for financial aid. The earlier parents start, the better the result for parents and children. Parents cannot afford to finance their children's future at the expense of their own. However, they can make sensible choices to help their children.