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Section G "Asset Information"

AwardYear: 1997-1998
Edition: PostSecondary
Part: 3 - - Filling out the Free Application for Federal Student Aid
SectionNumber:
SectionTitle: Section G "Asset Information"

PageNumbers: 75-79


Section G "Asset Information"

Purpose
: The purpose of Section G is to determine if a family's
assets are substantial enough to support a contribution toward a
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 they are subtracted from the value of the
assets when the EFC is calculated. After the net asset value has been
determined, an asset protection allowance is subtracted from the
parents' assets (a student's assets are not reduced by the asset
protection allowance in the EFC formula unless the student is
independent). Only the amount of the assets that exceeds the
allowance is expected to be available for meeting education
expenses, and only a portion of those available assets will be
assessed in the need analysis formula.

To make the application process easier, if a family qualifies for the
Simplified Needs Test it does not have to report assets in order to be
considered for federal student financial aid. However, state agencies,
private scholarship groups, postsecondary schools, or other groups
can require asset information from applicants using the FAFSA if the
applicants wish to also apply for nonfederal student aid with the
FAFSA.

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

Note that the family's principal place of residence is not
reported as an asset. This includes 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 operations." 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 only has
part ownership of an asset, only that part should be reported. The
general rule is that 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 responsible parent 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 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 investment items, including
trust funds, money-market funds, certificates of deposit, stocks,
bonds, other securities, installment and land 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 value of these properties and how much is
owed on them as of the date the application is signed.

Rental properties. Sometimes the applicant will claim that
rental properties represent a business. Generally, rental properties
must be reported under 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. Report the current market value of a business.
Include the value of land, buildings, machinery, equipment,
inventories, and the like. Don't include the family's primary 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.

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 family farm shouldn't be reported
as an asset.

Note that when current market value for a
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
value and the debt should 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 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 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 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 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, 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 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 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 present value of the parents'
rights to the trust principal 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 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 above. 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. 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 an asset on
the FAFSA. (The annual value of the tuition
prepayment should either be used to reduce
the student's cost of attendance or be
counted as estimated financial assistance.)

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 in 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.

Exclused assetss 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.).

Last Modified: 08/23/1998