FAFSA: Getting Down to the Basics

The first step in applying for aid is to complete the Free Application for Federal Student Aid (FAFSA). It is used to determine the student’s eligibility for federal aid programs, such as grants, work-study options, and loans. Schools also use the FAFSA to assess whether additional aid is available from the applicant’s state of residence and from the school itself.

With around 50 questions, the FAFSA asks for a host of personal information, including marital and citizenship status, tax- and income-related information, household size, and the schools the student will apply to. It also asks for details about the income, assets, and education history of the applicant’s parents.

Please note: Many private colleges and universities require aid applications in addition to the FAFSA. The most common of these is the CSS Profile. Check with each school’s financial aid office to determine which applications are required.

Tips for Navigating Income-Related Questions

The Role of Tax Returns

Information from the student’s and their parents’ tax returns is used to complete the FAFSA’s income-related questions. There is a two-year look back regarding the data required. This means that a family filling out the 2024–2025 FAFSA should use data from its 2022 tax returns. Consequently, tax returns filed in the student’s last two years of college will not affect aid awards.

Whose data should be used?

When parents live apart and are divorced or separated, factors are evaluated to determine which parent’s information must be provided. The primary factors include which parent provided the most financial support during the 12 months preceding the date the FAFSA is to be filed. Or, in situations where parents split the financial support equally, then FAFSA will look to the parent with the highest income.

For situations where the custodial parent has remarried, the step-parent’s information must also be included on the FAFSA. If the student’s parents are divorced, separated, or were never married but live together, both are required to provide information on the FAFSA.

Determining the Student Aid Index (SAI)

One reason the FAFSA requires so much detailed information is because the data is used to calculate each student’s Student Aid Index (SAI), which is a measure that determines how much federal aid a family may receive.

The formula for determining an SAI considers parental assets and income, student assets and income, and factors such as the number of family members attending college at the same time. Many people believe, incorrectly, that the SAI is the amount of money the family is expected to contribute to education costs; rather, the SAI is simply a number used by educational institutions to determine whether federal aid is available and, if so, how much.

• Parental assets. The questions the FAFSA asks about parental assets pertain to ownership interest at the time the application is completed. Reportable parental assets include cash and funds held in bank accounts, trust funds, 529 accounts, and more. Parental assets are considered low-impact assets for financial aid purposes—only up to 5.64 percent of the value of parental assets affects the SAI.
• Student assets. Student assets include property in which the student has an ownership interest at the time the FAFSA is completed. As an example, UTMA/UGMA accounts fall into this category.(Custodial 529 accounts and 529 accounts owned by the student are not considered assets of the student and should be listed as parental assets.) Student assets are considered high-impact assets for financial aid purposes—up to 20 percent of the value of their assets will affect the SAI.
• Protected assets. Some assets are protected and don’t need to be listed on the FAFSA, including 401(k) plans, pension plans, 403(b) plans, IRAs, and other retirement plans. Equity in a family’s primary residence, certain family-owned businesses and farms, life insurance, annuities, and personal possessions are also nonreportable.

If your children are approaching college age, it may be helpful to get an estimate of your family’s SAI. The U.S. Department of Education’s Federal Student Aid Estimator is a free calculator that can be used to create an estimate of financial aid eligibility.

Grandparent-Owned 529 Plans

Funds in a grandparent-owned 529 plan are not considered countable assets or income (when distributions occur out of the 529 plan) on the FAFSA.

Resources for Completing the FAFSA

For many parents and students, completing the FAFSA is a complicated process. Fortunately, several resources are available to help. Among the best is the Notes section at the end of the FAFSA itself. It offers guidance for answering some of the trickier questions.

Additional resources for completing the FAFSA include the Federal Student Aid website, which features a robust page of FAQs, a live chat feature, and other contact information for questions and assistance.

As always, before making any decisions, it’s a best practice to consult your financial advisor and a tax professional.