The FAFSA’s Asset Protection Allowance
If I were the betting type, I’d bet that the Asset Protection Allowance is the part of the FAFSA that gets the most attention. For this fall’s FAFSA, there’s a little bit of good news: It’s finally going up! This should be tempered by: Not by much!
The Asset Protection Allowance is probably the strangest calculation in all of FAFSA Land. Why is it going up for a change? After a decade of slowly rising median household income and low inflation, we may have finally hit the tipping point. Of course, the economic fallout of the pandemic is likely to change that trajectory.
Setting all of that aside, here is some data. The Federal Need Analysis Methodology for the 2021-22 Award Year shows that most married parents will see their Asset Protection Allowance increase by $600 or more; most single parents will be able to shield at least $400 more than last year.
What does that really mean? Since only 5.64% of assets above the Asset Protection Allowance count towards, EFC, having $600 less in FAFSA assets would decrease a family’s EFC by a whopping $34. However, even if the numbers are small, you should take reasonable actions to reduce your assets that might count towards your EFC. Since you have a few months, here are some suggestions:
Make a Roth IRA contribution with any extra money in your checking account. Retirement assets don’t count, so shifting money there takes it out of the formula. If you discover later that you weren’t eligible for the contribution, or that you need the money for something else, there is a process to withdraw it penalty-free.
Figure out which days of the month you have the least money in your bank account– typically after your mortgage/rent is paid but before the next paycheck hits– so you can be prepared to file the FAFSA in that window.
Plan to pay your credit card bill and any other bills before filing the FAFSA, regardless of its due date.
Parents of returning students should find out their school’s FAFSA due date– generally in the spring– and plan towards that.
And, while parents tend to obsess over their own assets, the more impactful assets are the student’s. That’s because students get an Asset Protection Allowance of $0 and 20% of their assets count in the EFC. A student with a summer job is therefore likely to get hit in the formula– every $500 in their bank account will increase their EFC by $100. Here are some things you can do to shelter your student’s assets:
Any money they earn that is specifically for college can be put into the parents’ 529 account. In some states, the student will even get a tax benefit for that.
Students with earned income can contribute to a Roth IRA. If they are under 18, the parent will open it as a custodial Roth.
Families might choose to have their student pick up some personal or household expenses in the fall to spend down their bank account and then reimburse them post-FAFSA filing.
Comments from Original post on The College Financial Lady Blog:
DIANA VOGEL July 20, 2020 at 11:09 am Edit
Question for you. We saved for college for our two children in a separate simple savings account and are had no idea that the FAFSA would count all of that as our cash assets.What would be the best way to hold the money? A 529? we do have retirement accounts but our oldest starts college this Fall so withdrawals will happen every few months. We are in Texas, if that affects anything. Thanks!
COLLEGEFINANCIALLADY July 20, 2020 at 11:51 am Edit
A 529 would be treated the same way as your savings account– both are parent assets which are assessed at 5.64%. Since I don’t believe you have state income tax in TX you probably don’t get a state tax deduction for 529 contributions. However, 529s have a couple of big advantages vs savings accounts: your interest is tax-free, and you are likely to get slightly higher growth in the account since the type of diversified fixed income portfolio you’ll get in an age-based 529 investment is likely to outperform a savings account given current very low interest rates (even for high-yield savings accounts). If your son gets need-based financial aid, then you definitely don’t want your college $$ in a retirement account because if you withdraw it to pay for college, you report it as income even if it’s coming from a Roth. (This is different from correcting/withdrawing an over-contribution to your Roth IRA.)
TAMMY DUTCH July 20, 2020 at 12:50 pm Edit
Hello – You are talking of upcoming FAFSA – October timeframe correct? And these need to be done every year correct, so savings and earning are always different – what is held in accounts?
COLLEGEFINANCIALLADY July 20, 2020 at 1:21 pm Edit
Correct– this refers to the FAFSA that comes out this October. The updated inputs get published in the Federal Register in advance of the FAFSA being available. And also correct– you do it every year so the info will be different based on changes to your income and assets.
DAN July 29, 2020 at 12:22 pm Edit
Is there an asset protection allowance for the student? We were going to have them pay most of the Fall tuition to bring down there assets and we will pay more in the Spring.
COLLEGEFINANCIALLADY July 29, 2020 at 12:33 pm Edit
No, all of the student’s assets are considered available to pay for college and are assessed at 20%. You are doing the right thing by having your student pay more in the fall, before you file the FAFSA.
NATHALIE FEOLA-GUERRIERI August 25, 2020 at 12:58 pm Edit
Can you post information concerning the CSS Profile? I know it’s different from each school to some degree, however, is there a worksheet or way to calculate a general idea on what the EFC is for CSS schools? Also, are there additional planning stategies in addition to those related to filing of a FAFSA (other than divorced parents issues). Thanks
COLLEGEFINANCIALLADY August 25, 2020 at 1:21 pm Edit
Yes, I’ll do that soon although as you mentioned, there’s no uniformity.
MEREDITH O October 5, 2021 at 3:34 pm Edit
Interesting read
