The 2014-2015 update to the federal college aid formula (Federal Need Analysis Methodology) has been announced, and like last year’s update, it penalizes parents that save – even more. The so-called asset protection allowance (APA) is the amount of non-retirement assets, like savings and investments that the formula allows parents to have without those assets being counted against a student for federal aid purposes. Two years ago, for the 2012-2013 academic year, the asset protection allowance for a 45 year-old married parent was $41,300 (in 2013-2014 it was $36,200). The recent update published in the Federal Register for the 2014-2015 academic year (when rising high school seniors will enter college), is only $30,700 (a paltry $7,100 if the parent is single).
That means a 25% drop in the amount of allowable assets under the federal college aid formula (corresponding to the FAFSA aid application) of $10,600 in two years, and a decrease in aid of up to $598 per year (5.64% of $10,600); $2,392 over four years. For families that save for college, the change in the formula penalizes them, raising their out-of-pocket cost of college versus families that do not save for college. The Department of Education says you can blame it on rising social security benefits.
What this means is that if you have savings, checking accounts, mutual funds, stocks, bonds, 529 college savings plans and other non-retirement assets that add up to more than $30,700, the first $30,700 ($7,100 if you are a single parent) does not get counted against your child for college aid, but up to 5.64% of the amount in excess of the $30,700 asset protection allowance does get counted.
College financial aid planning must occur well in advance of submitting any financial aid forms and most certainly before the tax base year. The base year is the tax year used to determine an incoming freshman’s financial aid. So if your student is a rising senior (or senior) in high school the base year is now: from January in their junior year until December of their senior year. It includes income, assets, and taxes for the parents and students.
As an Independent College Consultant I help families through the Admissions and Financial Aid process. Don’t delay! Planning takes time and the closer you get to December of the students senior year the more difficult it is to make adjustments to impact financial aid.