How to Shelter Assets on the FAFSA

Facebook icon Twitter icon Print icon Email icon
Mark Kantrowitz

By Mark Kantrowitz

February 19, 2024

A parent may want to shelter assets on the Free Application for Federal Student Aid (FAFSA) to increase the amount of financial aid their child receives. There are several strategies for sheltering assets on the FAFSA or reducing their impact on eligibility for need-based financial aid. These include:

  • Shift reportable assets into non-reportable assets
  • Reduce reportable assets by using them to pay down debt
  • Shift reportable assets from the student’s name to the parent’s name

Impact of Assets on the FAFSA

Reportable assets increase the Student Aid Index (SAI) on the FAFSA, thereby reducing eligibility for need-based financial aid. Need-based financial aid includes Federal Pell Grants, subsidized federal student loans, and the opportunity to enroll in a work-study program. Unsubsidized student loans are available to all students, regardless of financial need.

The impact of an asset depends on whether it is a student asset or a parent asset.

  • Student assets increase the SAI by 20% of the asset value on the FAFSA
  • Parent assets are assessed on a bracketed scale, increasing the SAI by up to 5.64% on the FAFSA

The FAFSA exempts certain applicants from asset reporting, formerly called a simplified needs test, which causes assets to be disregarded if the parent income (or student income if the student is independent) is less than $60,000, and certain other criteria apply. The CSS Profile does not have a simplified needs test.

The FAFSA also had an asset protection allowance that shelters a portion of parent assets based on the age of the older parent. However, the asset protection allowance is $0 2024-2025, a decrease from a peak of $84,000 in 2009-2010.

The CSS Profile has several specific asset protection allowances, such as allowances for emergency reserves and education savings, but not a general asset protection allowance.

Asset values are reported as of the date the application for financial aid is filed so that you can make changes to shelter assets on the FAFSA up until that date.

If you change the assets at the last minute, document the change by printing out the asset value from the account’s website. Otherwise, the asset value will be based on the most recent account statement.

Use our Financial Aid Calculator to estimate your financial need based on student and parent income and assets, family size, age of the older parent, and the student’s dependency status.

Which Assets Are Reportable on the FAFSA?

Some types of assets are reportable on the FAFSA, and some are not.

Reportable assets

Non-reportable assets

  • Qualified retirement plans, including 401(k), Roth 401(k), 403(b), IRA, Roth IRA, SEP, SIMPLE, Keogh, profit sharing, and pension plans. Qualified annuities are also not counted on the FAFSA. Contributions to a retirement account during the base year, however, do count as part of total income even though the retirement plan does not count as an asset.
  • Family home. The net worth of the family’s principal place of residence is not reported as an asset on the FAFSA but is reported as an asset on the CSS Profile. When reported as an asset on the CSS Profile, the net worth is often capped at 2 to 4 times income, depending on the college.
  • Personal possessions and household goods. Clothing, furniture, electronic equipment, personal computers, appliances, cars, boats, and other personal possessions and household goods are not reported as assets on the FAFSA and CSS Profile.

How different assets are reported on the FAFSA

Reportable assets are based on the net worth after subtracting any debts that are secured by the asset. Debts that are not secured by the asset do not affect the net worth. For example, if a family uses a home equity loan on the family home to buy a second home, the home equity loan reduces the net worth of the family home, not the second home.

Loan proceeds count as an asset if they remain unspent on the date the FAFSA is filed. A line of credit, however, is not reported as an asset.

Thus, the proceeds from the sale of the family home count as an asset on the FAFSA unless they are in escrow for the purchase of a new home. The intention to buy a new home is not enough.

Assets owned by a sibling are not reported on the student’s FAFSA but may be reported on the CSS Profile. Thus, while a regular 529 plan is reported as a parent asset on the FAFSA, even if the beneficiary is a sibling, a sibling’s custodial 529 plan account is not reported as an asset on the student’s FAFSA. It is reported as an asset on the sibling’s FAFSA.

Whole life and cash value life insurance policies are sheltered as retirement plans, but they are bad investments. The return on investment is inferior; they have high surrender charges and high sales commissions. Distributions are counted as untaxed income on the FAFSA and CSS Profile.

Borrowing from a life insurance policy won’t be reported as an asset on the FAFSA, assuming the money is borrowed after the FAFSA is filed, but the interest merely substitutes for the income that would otherwise have been received. The interest is also not deductible. Unpaid interest may eventually count as taxable income.

If ownership of an asset is involved in a legal dispute, the asset is not reported on the FAFSA or CSS Profile until the dispute is resolved. For example, bequests from a will are not reported as assets if the will is being challenged or the estate has not yet been settled.

Some states will ignore 529 plan investments in the state’s 529 plan when evaluating eligibility for state financial aid.

529 plans that are owned by a grandparent, aunt, uncle, and non-custodial parent are not reported as assets on the FAFSA, and starting with the 2024-2025 FAFSA, are not reported as untaxed income to the beneficiary on a subsequent year’s FAFSA. The CSS Profile counts all 529 plans that list the student as a beneficiary.

Trust funds must be reported as assets on the FAFSA, even if access to the principal is restricted. The main exception involves a court-ordered trust to pay for future medical expenses of an accident victim. Use our Trust Fund Calculator to determine the net present value (NPV) of a trust fund to help you value the trust fund for reporting it as an asset on the FAFSA.

See also: How 7 different assets can affect your financial aid eligibility

Convert Reportable Assets into Non-Reportable Assets

Increasing contributions to qualified retirement plans can transform reportable assets into non-reportable assets. Contributions during the base year will not reduce reportable income since the contributions will still count as part of total income (i.e., as untaxed income instead of adjusted gross income), but it will reduce reportable assets.

Contributions to a qualified annuity may be one of the most flexible ways of sheltering an asset.

Use Reportable Assets to Pay Off Debt and Other Obligations

Financial aid application forms do not consider debt as offsetting assets, except to the extent that an asset, such as margin debt, in a brokerage account secure the debt. So, using a reportable asset to pay down non-reportable debt, such as credit card debt and auto loans, will make the reportable asset disappear from the perspective of the financial aid formula.

Paying down a mortgage on the family home will reduce reportable assets on the FAFSA but not necessarily on the CSS Profile since the CSS Profile considers the net home equity of the family’s principal place of residence. However, if a college caps net home equity on the CSS Profile and the home equity already equals or exceeds the cap, then additional prepayment of the home mortgage will reduce reportable assets on the CSS Profile.

It may also be beneficial to accelerate necessary expenses so that the money is spent before the FAFSA is filed. For example, if the parents anticipate needing a new car, a new furnace, or a new roof, spending the money sooner may increase eligibility for need-based financial aid. Of course, this strategy should be used only for expenses that the parents were planning on spending anyway.

Shift Reportable Student Assets into the Parent’s Name

Money in a UGMA or UTMA account is reported as a student asset on the FAFSA. If the student is a dependent student, moving the money into a custodial 529 plan account will cause it to be reported as a parent asset on the FAFSA. This will reduce the assessment rate from 20% of the asset value to, at most, 5.64% of the asset value, thereby reducing the student aid index and increasing aid eligibility for need-based financial aid.

Another option is to spend the money in the UGMA or UTMA account on necessary expenses for the student’s benefit. For example, suppose the student will need a computer or car for college. Using UGMA or UTMA money to buy it before filing the FAFSA, as opposed to afterward, will increase eligibility for need-based financial aid.

Even if student assets, such as a savings account, cannot be shifted into the parent’s name, the family should spend down the student assets to pay for college before using the parent assets.

Caveats about Sheltering Assets on the FAFSA

Sheltering an asset may require selling the asset, which can result in capital gains. For example, contributions to 529 plans must be made in cash, so moving money from a UGMA or UTMA account to a custodial 529 plan may require liquidating the UGMA or UTMA account.

Capital gains during the base year will count as income on the FAFSA and CSS Profile. One workaround is to offset the capital gains with losses. Another option is to realize the capital gains prior to the base year for the FAFSA (e.g., prior to January 1 of the sophomore year in high school).

College financial aid administrators may question if the applicant’s income tax return shows a lot of interest and dividends during the base year, but no assets are reported on the FAFSA. Some financial aid administrators will infer a ballpark figure for the assets based on the interest and dividends and question if the reported assets are much lower than this figure. The applicant should be prepared to address these questions by providing documentation of the change in assets, such as showing how the assets were used to pay down debt.

Distributions from a non-reportable asset may need to be reported as income on the FAFSA. For example, a tax-free return of contributions from a Roth IRA must be reported as untaxed income on a subsequent year’s FAFSA. If the student will graduate in four years, then distributions on or after January 1 of the sophomore year in college will not affect eligibility for need-based financial aid. Another option is to wait until after graduation to take a tax-free return of contributions to pay down debt.

Other considerations

Often, family income dominates the calculation of the SAI. A high-income student might still not qualify for need-based financial aid even after sheltering assets, except perhaps at the most expensive colleges. So, before the family tries to shelter and shift assets on the FAFSA, they should use a financial aid calculator or a college’s net price calculator to consider the impact of zeroing out the assets.

If the student will not qualify for financial aid even after pursuing strategies for increasing eligibility for financial aid, it may be better to pursue tax minimization strategies, such as using the Kiddie Tax and income splitting.

Students who do not qualify for financial aid may consider borrowing private student loans to help fill a college savings gap.

See also:

A good place to start:

See the best 529 plans, personalized for you