High Income but Want Financial Aid? How 'Sheltered Assets' Increase Your FAFSA Payout
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| High Income but Want Financial Aid? |
College acceptance letters are arriving, and so is the panic about tuition bills. You fill out the FAFSA, hoping for some aid, but you are worried your savings account will disqualify you.
Here is the secret: The new FAFSA algorithm (SAI - Student Aid Index) does not look at all your money. It divides your wealth into two buckets: Assessable Assets (Bad) and Non-Assessable Assets (Good).
If you legally move your money from the "Bad" bucket to the "Good" bucket before filing, you can significantly increase your eligibility for financial aid.
The "Bad" Bucket: Assessable Assets
The government expects you to use up to 5.64% of these assets every year to pay for college (if you are a parent).
- Checking & Savings Accounts
- Brokerage Accounts (Stocks, Bonds, ETFs)
- Investment Real Estate (Rental Properties, Vacation Homes)
- Parent-Owned 529 Plans (Assessed at 5.64%)
⚠️ The 20% Trap: Student Assets
Assets in the Student's name (like a UTMA/UGMA custodial account or their own savings) are assessed at a brutal 20% rate. Strategy: Liquidate these accounts first or move the funds into a Custodial 529 Plan (which is treated as a parent asset at the lower 5.64% rate).
The "Good" Bucket: Sheltered Assets
Here is the magic. The FAFSA completely ignores the following assets. You could have $1 million in these accounts, and it won't hurt your aid eligibility at all.
1. Home Equity (Primary Residence)
Unlike the CSS Profile (used by some private colleges), the FAFSA does NOT count the equity in your primary home.
Strategy: If you have $50,000 sitting in a savings account (assessable), use it to pay down your mortgage (non-assessable). You just reduced your "wealth" on paper by $50,000 without losing a dime of net worth.
2. Retirement Accounts
401(k)s, IRAs, Roth IRAs, and 403(b)s are invisible to the FAFSA.
Strategy: Max out your retirement contributions before the base year ends. Move cash from your brokerage account into a Roth IRA (if eligible) or maximize your 401(k) contributions at work.
3. The "Grandparent 529" Loophole (New!)
Under the new FAFSA Simplification rules, 529 plans owned by grandparents, aunts, or uncles are NOT reported as assets.
Even better, when they withdraw money to pay for tuition, it is no longer counted as "untaxed income" for the student. It is completely off the radar.
4. Small Business Exclusion (Restored for 2026-27)
Good news for business owners: The exclusion for family-owned small businesses (with fewer than 100 employees) has been reinstated for the 2026-2027 cycle. Your business value is likely $0 on the FAFSA form.
Timing is Everything: The "Base Year" vs. "Snapshot"
FAFSA uses the "Prior-Prior Year" for Income (e.g., 2024 tax return for the 2026-27 school year). But for Assets, the snapshot is taken on the very day you file the form.
📅 The Last-Minute Shuffle
If you plan to file the FAFSA on October 1st:
- September 25th: Pay off all credit card debt using your savings. (Consumer debt is not subtracted from your assets, but the cash you hold is added. Pay it off to lower your assessable cash.)
- September 28th: Make a lump-sum mortgage payment or a big contribution to your IRA.
- October 1st: File the FAFSA. Your bank balance is lower, so your "Financial Need" is higher.
Chief Editor’s Verdict
This is not hiding money; this is following the rules.
Colleges will not volunteer this information. They want you to pay full price. By understanding the definition of "Assessable Assets" and utilizing the new Grandparent Loophole, you can legally shelter your wealth and potentially save thousands on your child's education.
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