For students to receive financial aid for college, they must first fill out the Free Application for Federal Student Aid (FAFSA). This form requires students and their parents to submit information about household income and assets. That information is used to calculate financial need and determine how much aid will be made available.

Filing the FAFSA is required to receive aid, and there are ways that families can maximize the amount of financial support that a student is considered eligible for.

What income is counted on the FAFSA?

Both student and parent income counts on the FAFSA. If you have a job as a student, you’ll need to report your earnings for the previous tax year on your upcoming FAFSA application.

Your parents’ income is all their earnings from work that’s reported on their taxes. That’s why the most recent tax filings are so important: They detail the latest earnings and can give you the most accurate estimate of your family’s situation. Retirement withdrawals, capital gains and some taxable scholarships may also be reported as income.

Items that may count as income:

  • Capital gains.
  • Child support.
  • Disability benefits.
  • Dividends.
  • Payments to tax-deferred retirement plans.
  • Proceeds from the sales of assets.
  • Retirement withdrawals.
  • Taxed and untaxed income.
  • Veteran’s benefits.
  • Worker’s compensation.

Some types of payments and earnings are not considered income under the FAFSA formula. Those may include:

  • Employer contributions to retirement plans.
  • Grants and scholarships.
  • Loan proceeds.
  • Tax credits.
  • Tuition assistance from employer.
  • Veteran’s Administration education benefits.
  • Welfare benefits.
  • Withdrawals from 529 college savings plans.
  • Work-study income.

What assets are counted on the FAFSA?

Assets are what either the student or the parent owns that could be collateral to help pay for college. This includes investments from rental properties, investment accounts, college savings plans and a business.

Assets that aren’t included are the family’s primary residence, cars and other possessions.

How do income and assets affect your financial aid eligibility?

The FAFSA’s primary metrics to measure your financial need are income and assets. If your family has a high relative income, you may receive less financial aid than a family with a relatively low income because the FAFSA will determine that you have a higher expected family contribution (EFC).

However, the cost of your school also affects your potential financial aid. Your financial need is calculated by subtracting your EFC from the school’s cost of attendance, so if you’re attending an expensive school, you may receive financial aid even if your family income is high.

Parent vs. student income and assets

What parents claim as assets and what students claim as assets are different. A 529 account counts as assets of the owner (not the student beneficiary). UGMA and UTMA accounts are student assets because the minor is the account owner.

Student income and assets generally affect EFC more than parent income and assets. This is why FinAid recommends transferring as many assets as possible from the child’s name to the parents’ before beginning the FAFSA.

What happens if you have a low income but high assets?

Income is more heavily weighted than assets on the FAFSA, meaning you may still qualify for financial aid if your family has a low income but high assets. This is true even if your family lives in an expensive home — primary residences are not considered assets for the FAFSA.

How can you maximize your financial aid eligibility?

It’s important to configure income, assets, savings and other financial college preparation into the right places to maximize how much you receive in federal financial aid. You can do this by:

  • Moving your assets to nonreportable asset accounts. If you have any reportable assets, you may want to move them into nonreportable asset accounts. For instance, if you have a 529 college savings plan, you could move those funds into a Roth IRA.
  • Completing the FAFSA as soon as possible. The FAFSA starts accepting applications on Oct. 1 every year for the following year. Since some need-based aid goes out on a first-come, first-served basis, you could get more aid the sooner you apply.

The bottom line

Any student seeking financial aid must complete the FAFSA and provide a full accounting of relevant income and assets for their household. It is possible to maximize the financial aid available by moving assets around or maintaining a 529 college savings plan or taxed retirement plan. The income and assets reported on the FAFSA will determine how much financial aid you are eligible for.