This article is from the Financial Aid, Scholarships, and Fellowships FAQ, by Mark Kantrowitz with numerous contributions by others.
The financial need of most families are assessed primarily on
income, not assets. Remember, the value of your home and
retirement plans will usually not be included in calculating the
parent contribution. [Although the federal calculation of
financial need does not include home equity, some private colleges
and universities still consider it when awarding institutional
grants.] Moreover, the federal methodology also ignores the first
$30,000 to $40,000 in savings and investments, depending on the
number of parents, their age, and the family size.
Consult an accountant before shifting parent assets to your
children. Although there can be a significant tax benefit,
remember that the federal methodology need analysis system assumes
that children contribute 35% of their assets to their education
each year. The federal methodology assumes that parents
contribute a MUCH lower percentage of their assets, so it is
usually better to leave the assets with the parents. Saving a few
dollars in taxes now may cost a lot more in aid eligibility later.
Some people may advise shifting assets to grandparents,
non-custodial parents (if parents are divorced) or other
relatives. Even if such asset-shifting games are financially
sound, they are at best unethical, if not fraudulent. You haven't
lost control over the assets -- your relatives cannot spend the
money as they wish. When you fail to report these assets on the
FAFSA and PROFILE, you are providing false information. Such
actions are as bad morally as stealing from your neighbors or
cheating on your taxes.
For most people parent assets are not really a factor in parent
contributions. The asset protection allowance prevents a threshold
amount of assets from being included in the calculation of the
parent contribution. Student assets, on the other hand, do play a
significant role in the calculation of the student contribution.