Every year, 20 million families file the Free Application for Federal Student Aid (FAFSA) and plenty of them inadvertently make costly mistakes.
To avoid the same fate, I’d urge you to check out the Edvisors Network’s free 201-page guide, entitled Filing the FAFSA. The guide, which you can download from Edvisors’ website, provides advice on how to maximize eligibility for financial aid, avoid common errors and complete the formquickly and accurately.
Mark Kantrowitz, who is probably the nation’s most famous financial aid expert, wrote the guide along with David Levy, who is the former financial aid director for Scripps College, Occidental College and Cal Tech.
Today I’m sharing the pair’s advice on which assets should be ignored when completing the FAFSA:
Assets You Shouldn’t Report On the FAFSA:
Never report money invested in qualified retirement accounts, such as Individual Retirement Accounts, 401(k) plans, 403(b)’s, SEP-IRA’s and pension plans on the FAFSA.
If you pull money out of any of these retirement accounts, however, this money must be treated as income on the FAFSA.
The FAFSA doesn’t ask you if you own a primary home so you could live in a palatial estate and it wouldn’t impact your chances for financial aid.
The CSS/Financial Aid PROFILE, which 250 mostly private colleges and universities use, does inquire about home equity, but individual schools will treat this asset quite differently. To learn more, read my previous posts:
A home equity line of credit is not reported as an asset on the FAFSA or the PROFILE unless the borrower has pulled money from the line of credit and has not spent this cash at the time the financial aid applications are completed.
Life insurance policy
The FAFSA doesn’t consider cash value life insurance as an asset. Because of this omission, some insurance agents like to peddle cash value life insurance as a way to hide parents’ assets. There are many reasons why you should stay away from so-called experts who make this suggestion.
As Kantrowitz and Levy note in their guide: “The high sales commissions, high premium, low return on investment, the nondeductible nature of the premiums and the surrender charges, among other problems, may cost the family more than they save from sheltering the money from the need-analysis process.”
In addition, going to all this trouble to hide assets is not only expensive, but usually unnecessary. To learn why, check my previous college blog post on this topic:
One more thing about life insurance: settlements from a life insurance policy will count as income.
The FAFSA also doesn’t consider assets in a small business that a family owns and controls. The small businesses must have less than 100 full-time or full-time equivalent employees. To be controlled by the family, t he family must own more than 50% of the business. The family member may include relatives by birth or marriage.
The PROFILE will want to know about business assets, but what the schools do with this information will vary by institution.
The FAFSA doesn’t want to know about assets in a farm if it is the family’s principal residence and the student and/or parents materially participate in the farming operation. The PROFILE will ask about a family farm, but once again schools will treat this asset will vary.
About Lynn O’Shaughnessy
Lynn O’Shaughnessy is a best-selling author and nationally recognized expert on college planning. The second edition of her book The College Solution was released in 2012. Lynn also writes a blog for CBS MoneyWatch and her website, The College Solution. A former Los Angeles Times reporter, she has written and been interviewed about college issues by numerous national media outlets. Lynn also shares with parents, financial professionals and college consultants how to make college more affordable in her five-week, online course, Cutting the Cost of College.
This commentary originally appeared on TheCollegeSolution.com
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