How Clients Can Maximize College Financial Aid

Your clients should know the FAFSA deadines and be sure to submit the form for each eligible child each year. The aid application has a two-year lookback period, meaning families must report income and assets from two years before the academic year starts. The year for which figures are reported is called the base year.

Most colleges and organizations that offer aid, including merit aid and scholarships, use the FAFSA as the starting point in their process.

Some clients might feel that their income is too high to bother with the FAFSA, but not completing this form can preclude their children from access to aid they might still qualify for. This can include aid offered directly through some colleges and universities, especially many private institutions where the cost of attending can be quite high.

COA and SAI

COA is the estimated cost of attendance at a given college or university. This includes costs such as tuition, room and board, books and a host of other expenses. The estimated COA is a key factor in qualifying for financial aid, especially for clients with higher income levels.

SAI is the student aid index, which is a number assigned to each student based on data from their FAFSA and the tax returns of the student and their parents. This takes both the student’s and parents’ income and assets into account, as well as family size.

The COA and SAI are key factors in determining the student’s eligibility for need-based aid.

FAFSA Income and Assets 

Income and assets from parents, students and spouses are considered when completing the FAFSA.

Students are typically expected to commit up to 20% of their unprotected assets to pay for college, while parents are expected to contribute up to 5.64%. Students are also expected to contribute a larger share of their income than their parents. The share of income varies based on the total level of income.

In other words: Whenever possible, it is advantageous to hold assets in the name of the parent instead of the student.

Income generally includes adjusted gross income and some types of untaxed income reported on tax returns. This includes:

• Wages and earnings from employment
• Social Security benefits, child support and unemployment benefits
• Income from some asset sales, withdrawals from retirement plans, and some pension payments received
• Assets such as cash in checking and savings, investments and real estate

Assets held in a retirement plan like a 401(k) or a pension are generally not considered reportable assets.

CSS Profile

The College Scholarship Service Profile is a form used by some 250 colleges, universities and scholarship programs to determine a student’s eligibility for non-federal financial aid.

Many of the country’s most expensive and exclusive private schools use the CSS to determine eligibility for aid. Schools and scholarship programs that require the CSS profile will typically specify this. In most cases, a student will want to complete both the FAFSA and the CSS.

How Do Certain Assets Affect Financial Aid Eligibility?

Different types of assets typically count differently in terms of their impact on the student’s eligibility for financial aid. Here are some examples.

Roth IRAs and Other Retirement Accounts

The value of your client’s traditional and Roth 401(k), IRA and other retirement accounts do not count against the student when calculating financial aid eligibility. This also includes the value of qualified annuities. But retirement plan contributions made and distributions taken during the base year are counted as income on the FAFSA.

Some families choose to take a penalty-free Roth IRA withdrawal to pay for college. But be warned: The amount withdrawn this way will count as untaxed income on the FAFSA.

Life Insurance and Annuities

The cash value of life insurance policies and qualified annuities owned by your clients are generally not reported on the FAFSA.

However, the value of nonqualified annuities — those held outside retirement accounts — are reported as investments.

Additionally, distributions from an annuity or from the cash value of a life insurance policy during the base year will generally count as income.

Home Equity

Your client’s equity in their residence will not count as an asset on the FAFSA form but will be counted on the CSS profile. It is capped at 2 to 3 times income on the CSS.

Equity in investment real estate or even a second home is considered an asset on both the FAFSA and the CSS. If your client used a home equity loan on their principal residence to buy a second home or an investment property, this debt does not reduce the level of home equity that must be reported on the FAFSA. This is because the home equity loan is secured by the value of their principal residence and not the second home or investment property.

UGMA and UTMA Accounts

Uniform Gifts to Minors Act and Uniform Transfers to Minors Act accounts can be a valid way for your client to help fund their children’s college education. One drawback to custodial accounts is that they count as student income and assets for financial aid purposes. Twenty percent of student assets are counted on the FAFSA as available to pay for college, and 25% are counted on the CSS.

Interest, dividends and capital gains from custodial accounts count as income on the FAFSA at a rate of 50%.

529 Plans

Funds held in a 529 plan that owned by a dependent student or one of their parents are counted as parental assets on the FAFSA. In other words, only 5.64% of the assets are counted.

Grandparents and other non-parents can also own 529 plan accounts to benefit a student. Under a rule change that took effect in 2024, contributions from a grandparent or other non-relative, including 529 plan assets, do not count on the FAFSA. However, the CSS still considers these assets.

Beyond Federal Student Aid

Many of your high-income clients may throw in the towel and assume their child will not qualify for any type of aid other than loans. While high income may limit your client’s access to federal programs, you should encourage them to look into other options.

Millions of dollars in grants and scholarships go unclaimed each school year. Encourage your clients to investigate these fully. These may be offered by certain schools, for certain majors and by a multitude of organizations of various types.

Encourage your clients to check with the college counselor at their child’s high school. Often these counselors are aware of many grants and scholarships that may not be known to the public.

Many companies offer tuition reimbursement as a workplace perk for employees. While this generally is meant to cover costs for employees, some companies offer this benefit for the children of employees as well. Have your client check with their employer.

Work with your clients to ensure they understand the ins and outs of the income and asset questions on the FAFSA and CSS (if applicable). In some cases they may be able to make some moves or delay others to have a more favorable result on these forms. Additionally, especially if their child will be attending a high-cost school, be sure to encourage them to look beyond basic aid packages.