Assets and Financial Aid

Financial Aid Algorithm

By Daniel A Barnes

Preparing for the financial aid application is an opportunity to clean up your family balance sheet.  Take advantage of it!

Many believe that it doesn’t pay to have saved for college.  That is partially true.  But the actual equation is more complicated; so complicated that it takes analysis and strategy to figure out each family’s best path.  This article seeks to illuminate some basic strategies to optimize financial aid vis a vis your current spending, budgeting and family assets.  For an exhaustive resource, check out Mark Kantowitz’s website Finaid.

The “EFC”
Each college financial application will result in a financial award package that is summarized in the “EFC”, the estimated family contribution.  The idea behind the EFC, is that it is comprised of past (savings), present (income), and future (loans).  It is the amount that each family is supposed to contribute toward the student’s college expenses including tuition, room and board, and some incidentals/travel.

Investing in the Citizenry
Financially speaking, a college education is as an investment in the family’s earning power.  More importantly, its a place for the further education, modeling and seasoning for young citizens to develop and prepare for increasing contributions as a young citizens of the social fabric.  The assumption underlying the algorithm that calculates each family’s annual college expense is that family assets will be consumed, to provide for the education of students. Like any investment, it takes cash.
Now, let’s look at family assets and possible strategies to reduce the consumption of your family assets.

Child Assets
Like in Orwell’s “Animal Farm”, some assets are more equal than others.  Child assets are expected to be consumed by college expenses, so 20% of assets in the child’s name go directly to the estimated family contribution right off the bat.  529 assets owned by a parent are treated as a parent asset, not a child asset.

Parent Assets
Other assets include everything to your name, with the exception of qualified retirement accounts and home equity*.  Some private colleges even count a portion of home equity to your assets. Reed College adds 2x your AGI from your home equity to your assets.   Not much of a difference, if your income is $60,000, but if its $140,000, this makes quite a difference ($280,000 extra of assets probably results in an additional $15,000 of annual EFC).

Approximately 5.6% of parent assets are expected to be consumed each school year in the estimated family contribution.  So if parent assets are $500,000, the EFC contribution from assets is $28,200.   Since most portfolios produce 1% to 4% of income, parents with investment accounts will be prudent to assume distributions from assets.  Unless you are really quite wealthy, this is a tricky balance.  Variables which change this EFC calculation substantially is equation include having multiple college attending children simultaneously.  Having two college aged students elicits an EFC of 1.25-1.4x the EFC of having one college aged student.  Also impacting the calculus is the age of the eldest custodial parent, and of course, the parent income.

Strategic Asset Planning
Unless your assets are in excess of $1 million, it probably makes sense to reduce your assets as possible.  The primary levers at most family’s disposal are:
1) Maximize your retirement contributions (qualified retirement accounts are not counted in your assets)
2) Pay down all non-mortgage debt (you get zero credit against your assets for outstanding debt balances)
3) Consider paying down mortgage debt/payments.
4) Accelerate necessary expenses (property taxes, etc., to reduce cash assets).
5) Make large-item purchases before filing FAFSA (free application for federal student aid) (computer, car, furniture, home repair).
6) Spend down students assets first.
7) Let relatives help pay tuition bills, rather than give money to the student or parents in advance.
8) For unusual circumstances, make an appointment with financial aid administrator to review your situation and appeal for an adjustment to the financial aid package.
9) Assets are effective as of the application date for the FAFSA.  Prepare and strategize beforehand!

Assessing the Situation – College Financial Planning:
With multiple hundreds of questions on the CSS Profile (the financial aid application for private institutions), and more than 130 questions on the FAFSA, the college financial aid departments are going to get a pretty good picture of your financial situation.  And they have an algorithm to crunch your numbers and produce an estimated financial aid award.  That award might seem generous to low-income families, and egregious to higher income families living in high-cost areas of the country.  Keep in mind, that you may always appeal a financial award. But these seem to work better at the expensive private universities than at the public ones.

Family Financial Planning
Each family needs to take a real look at how funding college is really going to affect their income and their assets.  It’s not easy to figure this out in advance, but you can try.  One good thing is that while the CSS Profile application does ask for the financial form of the non-custodial parent, the FAFSA does not.  So those going to public universities may be able to get financial assistance from both sets of parents without those assets and income being counted in the financial aid application.  Even better, nowhere in the financial aid applications is the income or assets of other family members asked.  Sisters, brothers, aunts, uncles and grandparents may all be resources to help fund the annual EFC while your kids are in college.

Get help where you can find it!


Daniel A. Barnes, CFA
Barnes Capital on La Fiesta Square
Lafayette, California

Barnes Capital, Inc. is a Registered Investment Advisor. We manage trusts and retirement income portfolios. Financial planning for each unique client and their household is part and parcel of our service.  Call Daniel at (925) 284-3503 and visit










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