How New FAFSA Rules Will Affect What Middle-Income Families Pay for College

For the first time in about forty years, some significant changes have been made in the FAFSA rules.

Low-income, and even some lower-middle income families, will definitely benefit from increases in Pell Grants and a higher income protection allowance. Though not much will change for high-income families, financial planning for college will be much more problematic for middle-income families. Many of the benefits that were helpful to these families under the old rules, are no longer going to be available to them. Some of the new rules, however, will also offer some new opportunities for savvy families to lower their college costs.

Reducing Costs Starts with Your Student

Reducing college costs depends on a lot of factors. First, is your student’s GPA and test scores. Even with the growing number of test-optional colleges, a high SAT or ACT score can make a big difference in the size of your student’s merit scholarship. If your student has a stellar academic record, it’s possible they may also qualify for acceptance at a highly selective university. Though these schools have list prices of over $80,000 per year, the net price will usually be much lower for middle-income families.

For families at the lower-end of the middle-income range, the cost to attend a highly selective university, may not be any more than attending an in-state public university. Though these schools do not usually give-out merit scholarships, they are very generous in how they distribute gift aid. Middle income families earning as much as $125,000 per year will often get a waiver on tuition. Even families with annual incomes around $200,000 may qualify for some need-based aid. This is why investing in private tutoring to increase the odds of being admitted to a highly selective university, may be well worth it.

Financial Aid Strategies that can also reduce costs

Since families need to do their financial planning on how to pay for college as early as possible, it’s also important to be aware of other strategies you can use to secure additional financial aid. Knowing how to get additional aid, however, requires learning how the financial aid system works under the new FAFSA rules.

Asset Assessments

The assessment rate on parent assets —5.64% under the federal formula and 5% under the institutional formula—will remain the same under the new FAFSA rules. With the exception of about 25 highly selective institutions, student assets will continue to be assessed at 20% under the federal formula and 25% under the institutional formula. It’s also important for families to know exactly which asset classes are assessed and which are not assessed as they proceed with their financial planning for college.

Assessable Assets Under the Federal Methodology

Under the Federal Methodology which is used by most public and private universities, the new FAFSA will assess all of the following assets:

  1. Cash accounts (savings, checking, CDs, money market .)
  2. Nonretirement stock and stock mutual fund accounts.
  3. Bonds, Including tax-free municipals, and bond mutual funds.
  4. Custodial Accounts (UGMAS & UTMAS)
  5. Section 529 and Coverdell Plans
  6. Vacation homes and rental properties
  7. Trusts
  8. Small Business and Farm values (may be rescinded by congress)

Under the new rules, small business and farm values have been added to the list of assessable assets. Since the assessment rate on business assets will be lower than on personal assets, however, some families may still benefit by moving their personal real estate assets into a business entity, that they create with the help of an attorney, to own the assets. Doing this, however, should only be done under the guidance of a financial-aid professional who can help determine the net benefit in using this strategy.

There is also a glimmer of hope that this particular rule change will be reversed by an act of Congress. There is already a bill proposed in the House of Representatives, The Family Farm and Small Business Exemption Act, that is receiving a lot of bi-partisan support. Unfortunately, there is not a lot of public awareness of this bill, as important as it is to millions of college families who happen to own a small business or a farm.

Reducing the amount of funds in any of the above accounts can, under the correct circumstances, lower what used to be called your Expected Family Contribution (EFC) for college. This term has been changed to a less threatening anagram, Student Aid Index (SAI). It still affects how much you are expected to pay for college, no matter what they call it.

Non-Assessable Assets Under the Federal Methodology

Accounts that the FAFSA does not assess are:

  1. Retirement plan assets (IRAs, Pension Plans, 401Ks, or Qualified Annuities)
  2. Personal Items like cars, furniture, etc.
  3. Home equity
  4. Cash values held in life insurance and annuities.
  5. 529s when the designated beneficiary is not the current student*

One of the changes in the new FAFSA rules that is favorable to middle income families is how contributions to retirement are treated. Under the old rules, any contributions to retirement accounts had to be added back to income before calculating your EFC. This is no longer true under the new rules. The penalty will be waived if used for qualified higher education expenses.

Though personal items aren’t assessed doesn’t mean you should run out a buy a new car to reduce your savings assets. If you need a new car anyway, however, it would make sense to buy it before you fill out the FAFSA.

You can also shelter funds by paying down your mortgage and increasing your home equity. Please note, however, that you may need to open a Home Equity Line of Credit (HELOC) to access these funds, should you not have sufficient liquidity to pay for college. The strategy will also not work if your child attends a college that uses the Institutional Methodology and assesses your home equity.

Finally, Life insurance cash values are also a place to legally shelter your assets from the FAFSA. Life insurance can be a great strategy, but only if you are working with a fiduciary who knows how to design and structure these complex financial instruments for college funding purposes. The fiduciary standard is also the absolute highest standard of accountability in the financial services industry.

Though a recent study by Ernst and Young clearly demonstrates that a properly designed strategy, which integrates cash value life insurance and annuities into your overall all financial plan provides significant value to investors, you should never use an insurance as a strategy only to shelter assets from the FAFSA, unless there are also clear benefits to your overall financial plan.

Under the old rules, all 529s (regardless of the designated beneficiary) had to be reported as parent assets. Pending further clarity from Department of Education, it now appears that there is a possibility that only those 529 accounts, in which the current student is the designated beneficiary, have to be reported on the FAFSA. Should this be the case, the rule change offers families an additional strategy to reduce college costs because money held in sibling 529 accounts can also be used to pay for the qualified expenses of the current student*

Assessable Assets-Institutional Methodology

  1. Cash accounts (savings, checking, CDs, money market and other cash on hand.)
  2. Nonretirement stock and stock mutual fund accounts.
  3. Bonds, Including tax-free municipals.
  4. Custodial Accounts (UGMAS & UTMAS)
  5. Section 529 and Coverdell Plans (uncertain if will follow FAFSA rules)
  6. Vacation homes and rental properties
  7. Trusts
  8. Small Business Value (will not be rescinded)
  9. Home Equity (Assessment rates will vary from college to college)
  10. Assets held in sibling accounts

Though the assessment rate will vary from college to college, with few exceptions, your home equity will also be assessed.  Accordingly, if you have $300,000 in home equity, you may end up paying an additional $15,000 a year ($60,000 over four years) for college.  Since this information is not available on each college’s website you will need to find out the details on your visit to the college’s financial aid office.

Though cash value in insurance is not assessed, it’s important to note that cash held in nonqualified annuities must also be reported and is counted as an asset under the Institutional Methodology.   This amplifies the importance of only engaging fiduciaries who understand the financial aid system.

Sibling assets are also assessed.  While moving some of own assets to a sibling will protect them from being assessed under the Federal Methodology, this is not the case under the Institutional Methodology.

Income Assessments

Under both of the above methodologies, the amount of money you earn is the first item that colleges take into consideration. If you make too much money, your earnings will eliminate the effectiveness of most of the FAFSA hiding places. Though not an arbitrary number, if you make over $200,000 AGI, the government and your college basically feels you have the means to pay for college from your personal income and the assets you have accumulated.

Under the old rules, you at least got a break if you had more than one child in college at a time. This break, however, is going away which is not a good outcome for families that already have two in college. In other words, you need to have the means to pay for all college expenses yourself. If you have more than one child in college at the same time, your only recourse is to use the appeals process. Like anything else, however, make sure you learn about this process to increase the odds of winning your appeal.

We always encourage families to take the time to learn how to appeal and, even negotiate for additional aid with their top-choice college. A strong appeal can take many thousands of dollars off the cost of educating your children.

Income Rule Changes that can Reduce Costs

So let’s review some of the income strategies, in light of the newest FAFSA Rules, that might reduce your college costs.

  1. You can now add more to your 401K to reduce your Adjusted Gross Income (AGI) without having to add this amount to your earnings as untaxed income. [Please be aware that utilizing this strategy will make these funds less liquid, less cash available to pay for college.]
  2. You can also withdraw money from a Roth IRA without needing to report it as untaxed income on the FAFSA. [Please note, however, that there are severe earnings and deposit restrictions on Roths)
  3. Grandparents can now contribute funds directly to the college without the funds being treated as student untaxed income on the FAFSA.
  4. There’s also good news for divorced parents. Untaxed child support is now reported as an asset, not as income and that make a big difference, considering that income is assessed at 47% and assets at only 5.64%.
  5. Alimony is only assessed if it is on your tax return

The bottom line on income assessments. If it’s not on your tax return it’s not assessable.

Student Loans

Regardless of your ability to pay for college, paying for it should involve your student taking their share of the responsibility. By sharing the burden, your student has “skin in the game”. Some parents will say, “I worked my way through college, my kids will do the same”. Others will say, “I don’t want my kids to have debts that will depress them.” Though we realize this is a family decision and may vary from family to family, previous studies have shown that students working up to 15 hours a week while in college get better grades than those not working at all. Not only do students get better grades, but they also acquire valuable work experience for their resume, reduce the necessity for student loans, and have a great opportunity for networking and sampling different career choices

Retirement Planning Must Also Be Considered when you do your Financial Planning for College

The Society of Actuaries (insert link below) recently conducted a study of Americans saving for both their own retirement and their children’s education. More than half of the respondents—58%–said they were retiring later than planned and 41% said they had withdrawn money from their own retirement funds to pay for their children’s education.

Bob Proctor, a Certified Financial Planner, from Shamrock Financial Planning, says “throughout our working careers we have to make major financial decisions on housing, retirement, auto purchases, and other major expenses. Unfortunately, those decisions tend to get made in a vacuum. It is difficult to coordinate all of our lifelong decisions holistically. When it comes to college planning, however, it is critically important to look at your retirement first. Remember, you can borrow for college, but not for your retirement”.


Always get yourself educated before doing your financial planning for college. There some great resources out there along with all a lot of misinformation. Ideally, find a Fiduciary who also has a good understanding of how the financial aid system works. Fiduciaries have an obligation to take a holistic view of all of the financial decisions that you are making. They are also required to point out to you how paying for college will affect your retirement. It’s important for all college families to not let their retirement suffer in order to send their children to college.

College Planning is way more comprehensive and involved than most people realize. Most families don’t want to do it alone. Having a team of experts can be very helpful, especially during the transition to the new FAFSA rules.

*The announcement about 529s was made at a meeting recently hosted by the Department of Education and was reported to us by a Financial Aid Officer that attended the meeting. This rule change, however, has not yet been stated in writing and we fear that the speaker representing the Department of Education may have wrongly assumed that the term “Education Savings Accounts” includes 529s, which it does not.

Jack Schacht is the founder of My College Planning Team,, based in Chicago.



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