Should I Empty My Bank Account for FAFSA?

The Free Application for Federal Student Aid (FAFSA) serves as the primary gateway for students seeking financial assistance for higher education. This application determines eligibility for various forms of federal student aid, including grants, scholarships, work-study programs, and federal student loans. Understanding how the FAFSA operates is a step in navigating the college financing landscape, as it plays a role in assessing a student’s financial need for college or career school.

How FAFSA Evaluates Financial Information

The FAFSA employs an approach to assess a family’s financial strength. A key component of this assessment is the Student Aid Index (SAI), an eligibility index number, replacing the former Expected Family Contribution (EFC). A lower SAI indicates a greater demonstrated financial need, which translates into eligibility for more need-based financial aid. This index number is derived from a review of both the student’s and, if applicable, their parents’ financial information, including income and reported assets.

The FAFSA considers financial data from the student and, for dependent students, their parents. This includes adjusted gross income, tax-exempt interest, and untaxed portions of IRA distributions and pensions. Student-owned assets and income are weighted more heavily in the SAI calculation compared to parent-owned assets.

Types of Assets Considered for FAFSA

Various types of assets are considered for FAFSA. Cash, along with funds held in checking and savings accounts, are counted as assets. Countable assets also include non-retirement investment accounts, such as brokerage accounts holding stocks, bonds, mutual funds, and certificates of deposit (CDs). Real estate beyond the family’s primary residence, such as vacation homes or rental properties, is also included.

Qualified education savings plans, such as 529 college savings plans and Coverdell Education Savings Accounts (ESAs), are counted as assets if owned by the parent or a dependent student. UGMA and UTMA accounts are also considered student assets, though for dependent students, they are treated as parental assets. The net worth of businesses and investment farms are now reported as assets, regardless of the number of employees.

Conversely, several asset categories are not considered. The family’s primary residence is not reported as an asset. Qualified retirement accounts, including 401(k)s, IRAs, Roth IRAs, 403(b)s, and pension funds, are excluded. The cash value of life insurance policies and qualified annuities are not counted. Personal property, such as vehicles, furniture, and clothing, is not included.

The Role of Timing in FAFSA Reporting

The FAFSA captures a “snapshot” of a family’s assets as of the day the application is submitted. This means that the balances in checking and savings accounts, as well as the value of other reportable assets, are recorded on that date. Financial aid administrators use this snapshot to determine the asset component of the Student Aid Index.

In contrast to assets, FAFSA uses “prior-prior year” (PPY) income data for its calculations. This means income information is from two tax years prior to the academic year. For example, the 2025-2026 FAFSA relies on income and tax information from the 2023 tax year. This approach allows families to use already completed tax returns, simplifying the application process and increasing accuracy.

Changes to assets that occur after the FAFSA has been filed for a particular aid year do not impact the financial aid calculation for that specific year. The asset data remains fixed from the submission date. Attempting short-term transfers of funds between countable accounts just before filing is ineffective, as the funds retain their countable status. The key is the value of the assets on the day of submission.

Impact of Asset Holdings on Financial Aid Eligibility

A family’s asset holdings directly influences financial aid eligibility through the Student Aid Index (SAI) calculation. The impact varies depending on whether the assets belong to the student or the parent. Student assets are assessed at a higher rate, with up to 20% of their value contributing to the SAI. This means that for every dollar a student holds in countable assets, a substantial portion is considered available for college expenses.

Parental assets, in contrast, are assessed at a more favorable rate, with a maximum of 5.64% of their unprotected value contributing to the SAI. The asset protection allowance has been removed, which previously shielded a portion of parent assets from being included in the SAI calculation. For the 2024-2025 FAFSA and beyond, this allowance is $0, meaning all countable parental assets are considered in the calculation, subject to the assessment rate.

For many families, the impact of bank account balances on financial aid eligibility may be less significant than often perceived. Even with the removal of the asset protection allowance, the relatively low conversion rate for parent assets means that only a small percentage of their total value directly increases the SAI. Last-minute financial maneuvers, such as attempting to empty a bank account without a clear understanding of FAFSA rules, are often ineffective for increasing aid. Such actions could also disrupt a family’s personal financial stability. Long-term financial planning strategies are more beneficial than short-term manipulations when aiming to optimize financial aid eligibility.