Are Annuities a Reportable Asset on FAFSA?
Navigate FAFSA's treatment of annuities. Learn which types are reported, how they impact student aid, and the correct reporting process.
The Free Application for Federal Student Aid (FAFSA) is the primary application for federal student aid, including grants, work-study programs, and loans. It evaluates a family’s financial strength to determine eligibility for need-based aid. The FAFSA considers various financial assets, and understanding how holdings like annuities are treated is important for applicants.
Understanding Annuities and FAFSA Asset Treatment
Annuities are contracts designed to provide a steady stream of income, often during retirement. They are funded either with a lump sum or through a series of payments. The tax and financial aid treatment of annuities varies based on their classification.
A key distinction for FAFSA purposes is between qualified and non-qualified annuities. Qualified annuities are held within tax-advantaged retirement accounts, such as a 401(k), 403(b), or Individual Retirement Account (IRA). Funds contributed to these annuities are pre-tax, and their growth is tax-deferred. Non-qualified annuities, conversely, are funded with after-tax dollars and exist outside of traditional retirement plans.
For FAFSA reporting, qualified annuities held within retirement plans are not reported as assets. This aligns with FAFSA’s policy of not counting most retirement accounts. The Higher Education Act of 1965 outlines that investments do not include retirement plans, such as 401(k)s, pension funds, and annuities, when they function as a form of retirement plan.
Non-qualified annuities are treated differently. These are considered investment assets and must be reported on the FAFSA. This distinction exists because non-qualified annuities lack the annual contribution limits found in qualified retirement plans, allowing individuals to potentially shelter large sums of money from financial aid calculations if they were not reported.
Another consideration is whether an annuity is in its accumulation phase or has been annuitized. During the accumulation phase, its value is considered an asset if it is a non-qualified annuity. Once an annuity is annuitized, meaning it has begun making regular payments, the payments are considered income rather than an asset. This income, whether from qualified or non-qualified annuities, is reported on the FAFSA as part of total income, potentially affecting aid eligibility.
Calculating the Impact on Student Aid Index
The value of reportable assets, including non-qualified annuities, directly influences a student’s eligibility for federal financial aid through the Student Aid Index (SAI). The SAI, which replaced the Expected Family Contribution (EFC), is a metric used by colleges to determine how much a family can reasonably contribute toward educational costs. A lower SAI indicates a greater financial need and potentially more aid.
The FAFSA assesses a portion of both parent and student assets when calculating the SAI. For parents, assets are assessed at a rate of up to 5.64% of their value. Student assets, however, are assessed at a higher rate, 20% of their value. This means that every $1,000 in a parent’s reportable assets adds up to $56.40 to the SAI, while the same amount in a student’s name adds $200.
Historically, the FAFSA included an “asset protection allowance” which sheltered a certain amount of parental assets from being considered in the SAI calculation. However, for the 2024-2025 FAFSA and subsequent years, this asset protection allowance has been reduced to $0. This change means that all reportable parental assets, including the value of non-qualified annuities, will directly contribute to the SAI calculation without any initial shielded amount.
A higher reported asset value, including the current market value of a non-qualified annuity, leads to a higher SAI. This increased SAI reduces the student’s demonstrated financial need, which results in a lower amount of need-based financial aid offered. While assets are weighed less heavily than income in the SAI formula, their inclusion impacts the overall aid package.
Reporting Annuity Information on the FAFSA
When completing the FAFSA, the current market value of reportable annuities must be accurately entered. The FAFSA form categorizes assets into specific sections for both students and parents.
To report a non-qualified annuity, locate the “Parent’s Assets” or “Student’s Assets” section, depending on who owns the annuity. The value of the annuity should be included under “Investments.” The FAFSA asks for the current net worth of investments, which includes non-qualified annuities.
The amount to report is the current value of the annuity in its accumulation phase. This represents the amount available if the contract were surrendered, minus any surrender charges or outstanding loans. Obtain the most recent statement from the annuity provider to ensure the reported value is accurate as of the date the FAFSA is filed. This figure is then entered into the FAFSA’s online portal or on the paper form.