Maintained for Historical Purposes

This resource is being maintained for historical purposes only and is not currently applicable.

Section I -- "Asset Information"

AwardYear: 1994-1995
Edition: PostSecondary
Part: 3 - - Filling Out the Free Application for Federal Student Aid
SectionNumber:
SectionTitle: Section I -- "Asset Information"

PageNumbers: 85-88


PURPOSE: THE PURPOSE OF SECTION I IS TO DETERMINE
IF THE FAMILY'S ASSETS ARE SUBSTANTIAL ENOUGH TO
SUPPORT A CONTRIBUTION TOWARDS THE STUDENT'S
COST OF EDUCATION. NOTE THAT ONLY THE NET ASSET
VALUE IS COUNTED IN THE NEED ANALYSIS. ANY DEBTS
AGAINST THESE ASSETS ARE REPORTED IN THIS SECTION,
AND ARE SUBTRACTED FROM THE VALUE OF THE ASSETS
WHEN THE EFC IS CALCULATED. AFTER THE NET ASSET
VALUE HAS BEEN DETERMINED, A SUBSTANTIAL ASSET
RESERVE IS USUALLY SUBTRACTED FROM THE PARENT'S
ASSETS (STUDENTS GENERALLY DO NOT RECEIVE AN
ASSET RESERVE IN THE EFC FORMULA UNLESS THEY ARE
MARRIED OR HAVE DEPENDENTS). ONLY THE AMOUNT
OF THE ASSETS THAT EXCEEDS THE RESERVE IS
EXPECTED TO BE AVAILABLE FOR MEETING
EDUCATIONAL EXPENSES, AND ONLY A PORTION OF
THOSE AVAILABLE ASSSETS WILL BE ASSESSED IN THE
NEED ANALYSIS FORMULA

To make the application process easier, a family does not have to
report assets if it qualifies for the Simplified Needs Test.

An asset is property owned by the family that has an exchange
value. Possessions such as a car, a stereo, or clothes or furnitureare
not reported as assets on the financial aid application.

NOTE THAT THE FAMILY'S PRINCIPAL PLACE OF
RESIDENCE IS NO LONGER REPORTED AS AN ASSET. THIS
INCLUDES A FAMILY FARM IF THE FAMILY CLAIMED ON
SCHEDULE F OF THE TAX RETURN THAT IT "MATERIALLY
PARTICIPATED IN THE FARM'S OPERATION."


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 only
has part ownership of an asset, that part should be reported. The
general rule is that the value of an asset should be divided by the
number of people who share ownership, unless the share of the
asset is based on 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 responsible parent
would not list any value for the property or debts against it.
However, if the ownership of the property is not being contested,
the property would be reported 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 has
completed legal action to take possession of the asset.

Other Real Estate and Investments Value

"Investments" include a wide range of investments, including trust
funds (see next heading), money market funds, certificates of
deposit, stocks, bonds, other securities, installment and lands sale
contracts, 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
owned by the student or parents. Report the net value of this
property as of the date the application was signed.

RENTAL PROPERTIES. Sometimes the applicant will claim
that rental properties represent a business, which would receive
the higher Farm/Business offset. Generally, rental properties
must be reported under Real Estate rather than Farm or 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. Report the current market value of a business.
Include the value of land, buildings, machinery, equipment,
inventories, etc. Don't include the home even if it is part of the
business. Then write in what is owed on the business, including
the unpaid mortgage and related debts.

FARM. When reporting the current market value of a farm, the
student should include the value of the land, buildings,
machinery, equipment, livestock, and inventories. The amount
of farm debt reported should include the unpaid mortgage and
related debts, as well as any loan for which the farm assets were
used as collateral.

(Note that when current market value for business/farm is
reported, it must be the amount the business/farm could sell for as
of the date of the application. Also, if the student or parent is not
the sole owner of the business/farm, only his or her share of the
debt must be reported.)

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 the IRS Form 1040. Therefore, if there is an amount reported
on this line, the family probably has an asset that should be
reported on the financial aid application.

The asset value to be reported is the value of the take-back
mortgage. Note that 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" on
the application. This amount will decrease each year depending
on how much of the principal the buyer paid back that year.

(This discussion would also apply to other forms of seller
financing that result from 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 assets 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 is 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 present value of the trust must be reported as
an asset, even if the beneficiary's access to the trust is restricted. If
the grantor of a trust has voluntarily placed restrictions on the use of
the trust, then the trust would be reported 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 or the principal of the trust, 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/she will receive in the future. The present value of
the interest the person will receive while the trust exists can
usually be calculated by the trust officer. This value represents
the amount a third person would be willing to pay in order 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 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 present value of
the parents' right to the principal of the trust must be reported as
a parental asset. The present value of the principal is the
amount that a third person would pay at the present time 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 present value of both interest and principal would be
reported, as described on the preceding page. If the trust is set
up in such a manner 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, it would not be reported
as an asset. One example of such a restricted trust is a trust that was
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 an asset on
the FAFSA. This is a change in previous policy.

Excluded assets

Some assets are not to be reported on the financial aid application.

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 as an incremental distribution, the income would
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 any property received under the
Distribution of Judgement 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.).

Last Modified: 02/19/1998