Applying for financial aid can be stressful, and although the FAFSA definitely simplifies the process, certain parts of the application can be ambiguous.
One such section of the application is net worth of current investments, both student’s and parents’. The FAFSA details various assets which fall into the category of investments, such as stocks, bonds, trust funds, mutual funds, and other financial investments, but it also includes various kinds of property. Thinking about how to account for property when filling out your FAFSA raises 4 questions:
1. What kinds of property are included or excluded from the FAFSA’s documentation of investments?
The investments questions of the FAFSA note that real estate, rental property, and land sale contracts are included. Real estate does not include you or your parents’ current home, but only those properties that you own in addition to where you live. Rental property is included under investments as long as your involvement doesn’t go beyond the simple renting of the property. If you provide services for your tenants, such as maid services, then that rental property would be listed under business/farm assets. Land sale contracts are purchasing agreements between a real estate owner and the buyer. These are included in the calculation of net worth of current investments.
2. How is property net worth calculated? Is it different from calculating the net worth of other investments?
Net worth is simply (property value) – (debt owed on that property). The basic formula is no different from calculating the net worth of any other investment.
3. How does the net worth of my or my parents’ investments affect my EFC (Expected Family Contribution) and subsequent financial aid package?
The FAFSA uses a unique formula to calculate your EFC. This EFC is made up of parents’ contribution from income and assets, as well as student’s contribution from income and assets. As such, the net worth of either party’s investments carries substantial weight. Within the formula, net worth of investments is one of the components added into your EFC total, and so overestimation rooted in misunderstanding could hike up your EFC. Once colleges have the EFC, they subtract it from their cost of attendance to estimate your financial aid need.
4. Do the FAFSA’s criteria leave out information that could have affected your EFC?
The FAFSA’s criteria for what is included as an investment clearly exclude the value of the parents’ or student’s current home. Including this value in the calculation of investments’ net worth may have more potential to do harm and increase someone’s EFC than it does to help, but more information is always useful, especially with regards to finance. The more information available, the more context an educational institution can receive about a family’s financial situation. If you ever feel slighted by the FAFSA’s methods or think its formula leaves out important information, your best recourse is to appeal your financial aid decision and work with the school itself.