Part: 3 - - Completing The FAFSA
SectionTitle: Section F "Asset Information"
Section F "Asset Information"
Purpose: The purpose of Section F is to determine if a family's assets are substantial enough to support a contribution toward a student's COA. Only the net asset value is counted in the need analysis. Any debts against these assets are reported in this section, and they are subtracted from the value of the assets when the EFC is calculated. After the CPS determines the net asset value, the CPS subtracts an asset protection allowance from the parents' assets. The asset protection allowance does not reduce a dependent student's assets, only those of an independent student. Only the amount of the assets that exceeds the allowance is expected to be available for meeting education expenses, and the CPS assesses only a portion of those available assets.
If a student qualifies for the Simplified Needs Test, he or she does not have to report the family's assets. However, state agencies, private scholarship groups, postsecondary schools, or other groups may require asset information from applicants using the FAFSA if the applicants wish to also apply for nonfederal student aid.
An asset is defined as property owned by the family that has an exchange value. A student does not report as assets possessions such as a car, a stereo, clothes, or furniture.
A family's principal place of residence is not reported as an asset. Neither is a family farm if the farm is the principal place of residence and the family claimed on Schedule F of the tax return that it "materially participated in the farm's operation." In certain instances, however, even if the family farm is incorporated and the family files a corporate return instead of IRS Schedule F, the value and debt of the farm are not reported on the FAFSA. In such cases, the applicant must show evidence that family members own all shares of stock in the corporation and that those family members also reside on the farm.
Ownership of an Asset
There are several situations where the ownership of an asset may be divided or contested:
Part ownership of asset. If the parent or student has only part ownership of an asset, he or she should report only that part. Generally, the value of an asset and debts against it should be divided equally by the number of people who share ownership, unless the share of the asset is determined by the amount invested or the terms of the arrangement specify some other means of division.
Contested ownership. Assets should not be reported if the ownership is being contested. For instance, if the parents are separated and they may not sell or borrow against jointly owned property that is being contested, the parent reporting FAFSA information would not list any value for the property or any debts against it. However, if the ownership of the property is not being contested, the parent would report the property as an asset. If ownership of an asset is resolved after the initial application is filed, the student is not required to update this information.
Lien against asset. If there is a lien or imminent foreclosure against the asset, the asset would still be reported until the party holding the lien or making the foreclosure completes legal action to take possession of the asset.
Other Real Estate and Investments Value
Investments include a wide range of investment items, including trust funds, mutual funds, money-market funds, certificates of deposit, stocks, bonds, other securities, installment and land sale contracts (including mortgages held), commodities, and precious and strategic metals. Investments also include money loaned out by the student or parent (the unpaid principal would be reported as an asset). Real estate includes second or summer homes or rental properties the student or parent owns. A student should report the value of these properties and how much is owed on them as of the date the application is signed.
Rental properties. Sometimes the student or parent will claim that rental properties represent a business. Generally, rental properties must be reported as real estate rather than as business assets. To be reported as a business, a rental property would have to be part of a formally recognized business. (Usually such a business would provide additional services, such as regular cleaning, linen, or maid service.)
Business. A student should report the current market value of a business and should include the value of land, buildings, machinery, equipment, inventories, and the like. He or she should not include the family's primary home, even if it is part of the business. In the next question, the student should write in what is owed on the business, including the unpaid mortgage and related debts.
Investment farm. When reporting the current market value of an investment farm, the student should include the value of the land, buildings, machinery, equipment, livestock, and inventories. The farm debt reported should include the unpaid mortgage and related debts, as well as any loan for which farm assets were used as collateral. As noted earlier, a student should not report a family farm as an asset.
Note that when current market value for a business/farm is reported, it must be the amount for which the business/farm could sell as of the date of the application. Also, if the student or parent is not the sole owner of the business/farm, he or she should report only his or her share of the value and the debt.
"Take-back" mortgages. In a "take-back" mortgage, the seller takes back a portion of the mortgage from the buyer and arranges for the buyer to repay that portion of the mortgage to the seller. For IRS purposes, the seller must report the interest portion of any payments received from the buyer on Schedule B of IRS Form 1040. Therefore, if an amount is reported on this line of the tax return, the family probably has an asset that should be reported on the FAFSA.
The value of the take-back mortgage is the value that the student should report. There would be no debt reported against this asset. For instance, if the family sold its house for $60,000 and had a take-back mortgage of $20,000, the family should report $20,000 under "Other real estate and investments value." This amount will decrease each year, depending on how much of the principal the buyer paid back that year. (This concept would also apply to other forms of seller financing of the sale of a home or other property.)
Trust Funds and Tuition Prepayment Plans
Trust funds in the name of a specific individual should be reported as that person's asset on the application. In the case of divorce or separation, where the trust is owned jointly and ownership is not being contested, the property and the debt are equally divided between the owners for reporting purposes, unless the terms of the trust specify some other method of division.
As a general rule, the student must report the present value of the trust as an asset, even if the beneficiary's access to the trust is restricted. If the settlor of a trust has voluntarily placed restrictions on the use of the trust, then the student should report the trust in the same manner as a trust that did not have any specific restrictions. The way in which the trust must be reported varies according to whether the student (or dependent student's parent) receives or will receive the interest income, the trust principal, or both.
Interest only. If a student, spouse, or parent receives only the interest from the trust, any interest received in the base year must be reported as income. Even if the interest accumulates in the trust and is not paid out during the year, the person who will receive the interest must report an asset value for the interest he or she will receive in the future. The trust officer can usually calculate the present value of the interest the person will receive while the trust exists. This value represents the amount a third person would be willing to pay to receive the interest income that the student (or parent) will receive from the trust in the future.
Principal only. The student, spouse, or parent who will receive only the trust principal must report the present value of his or her right to the trust principal as an asset. For example, if the principal is $10,000 and it reverts to a dependent student's parents when the trust ends in 10 years but the student is receiving the interest earned from the trust, the student must report as a parental asset the present value of the parents' rights to the trust principal. The present value of the principal is the amount that a third person would pay at the present for the right to receive the principal 10 years from now (basically, the amount that one would have to deposit now to receive $10,000 in 10 years, including the accumulated interest). Again, the present value can be calculated by the trust officer.
Both principal and interest. If a student, spouse, or parent receives both the interest and the principal from the trust, the student should report the present value of both interest and principal, as described in the discussion of principal only. If the trust is set up so that the interest accumulates within the trust until the trust ends, the beneficiary should report as an asset the present value of the funds (both interest and principal) that he or she is expected to receive when the trust ends.
If a trust has been restricted by court order, the student should not report it as an asset. An example of such a restricted trust is one set up by court order to pay for future surgery for the victim of a car accident.
Note that the Michigan Education Trust and all similar tuition prepayment plans are excluded from being reported as assets on the FAFSA. (The annual value of the tuition prepayment should either be used to reduce the student's COA or should be counted as estimated financial assistance.)
Some assets that are not reported follow:
Pensions and whole life insurance. Pensions are not counted as assets for application purposes. Of course, when the income from a pension is distributed to the beneficiary, either as a lump sum or in incremental distribution, the income must be reported. The cash value or built-up equity of a life insurance policy (often referred to as a whole-life policy) is not reported as an asset.
Excluded assets for Native American students. The law explicitly excludes reporting any property received under the Per Capita Act or the Distribution of Judgment Funds Act (25 United States Code 1401, et seq.), the Alaska Native Claims Settlement Act (43 United States Code 1601, et seq.), or the Maine Indian Claims Settlement Act (25 United States Code 1721, et seq.).