Impact of the Decreases in the Asset Protection Allowance

Every $10,000 decrease in the asset protection allowance may cut a student’s financial aid eligibility by as much as $564. So, the $33,700 decrease in the asset protection allowance for a 48-year-old parent from 2009-2010 to 2016-2017 may decrease a student’s eligibility for need-based financial aid by as much as $1,900. For a dependent student whose parent is 65 years old, the $54,400 decrease in the asset protection allowance from 2009-2010 to 2016-2017 may reduce aid eligibility by as much as $3,068.

The decrease in aid eligibility for independent students without dependents other than a spouse is similar. The decrease in aid eligibility for independent students with dependents other than a spouse is not as severe, up to $329 per $10,000 decrease in the asset protection allowance.

The asset protection allowance is now so low that it does not protect basic assets from being assessed by the federal financial aid formula. For example, personal finance experts recommend that people save at least 6 months’ salary in an emergency fund to cover unforeseen expenses and job loss. The asset protection allowance now covers only a portion of the money in the typical parents’ emergency fund.

The asset protection allowance also does not protect money that parents have saved to pay for their children’s college education. The average amount of money in a 529 college savings plan was $20,474 as of December 31, 2014, according to the College Savings Plan Network, an amount greater than the asset protection allowance for most parents of college-age children.

Low-income students may not be affected by the decrease in the asset protection allowance because of the Simplified Needs Test. The Simplified Needs Test disregards all assets on the applicant’s FAFSA if the parents (or the student and spouse, in the case of an independent student) have an adjusted gross income (AGI) less than $50,000 and either were eligible to file IRS Form 1040A or IRS Form 1040EZ or someone in the household qualified for certain federal means-tested benefits during the last two calendar years (e.g., Supplemental Security Income (SSI), Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families(TANF), Special Supplemental Nutrition Program for Women Infants and Children (WIC) or the Free and Reduced Price School Lunch Program). So, the decrease in the asset protection allowance mainly affects middle-income and high-income students who don’t qualify for the Simplified Needs Test.

Cause of the Decreases in the Asset Protection Allowance.  The asset protection allowance tables are revised annually according to rules specified by the Higher Education Act of 1965 in 20 USC 1087rr(d). The asset protection allowance depends to a great extent on the difference between the current moderate family income and the current average Social Security retirement benefits, which can change significantly from one year to the next. When average Social Security retirement benefits increase faster than the increase in a moderate family income, the gap is smaller, leading to a smaller asset protection allowance. The moderate family income has been flat or decreasing since 2009-2010, while the average Social Security retirement benefit has continued to increase, causing a sharp decline in the asset protection allowance.

If current trends continue, the asset protection allowance will disappear entirely in just a few more years.

Since the asset protection allowance depends on current income and retirement benefit figures, it can vary significantly from one year to the next. Even college financial aid professionals often find this lack of stability in the asset protection allowance to be confusing.  If you do not know your EFC or your families Asset Protection allowance, please contact The College Advisor.  We will provide this information to you Free of charge.

In addition, the asset protection allowance is based on a net present value calculation that involves unrealistic assumptions, such as a 6% annual inflation rate, an 8% rate of return on an annuity and a 6% sales commission on an annuity. The annual inflation rate was last at or above 6% in 1982. The average inflation rate was 2.4% over the last 25 years and 3.8% over the last 40 years. The rate of return on an annuity is closer to 2% to 3%.


- this post is an edited version originally published on eadvisors.com
 


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