Logic behind single parent asset protection amount

calmom
Mon, 02 Jan 2012 20:57:02 +0000

If it is any consolation,the calculation is different for schools that use institutional methodology - generally CSS Profile schools. “Institutional Methodology” (IM) is something of a misnomer, because there is not one single formula that all the schools use- rather, the College Board has developed a system along with some guidelines, but colleges are able to modify the guidelines somewhat to suit their own purposes. But here’s one article that gives a summary of some of the ways the asset evaluation might differ under IM:



The IM system, however, make two allowances that are designed to actually assist families: The Emergency Reserve Allowance and the Cumulative Education Savings Protection Allowance. IM subtracts both allowances from assets before it calculates what the family’s net worth would be to pay for college expenses.

To better understand these two allowances, a brief, succinct explanation of both is in order. The Emergency Reserve Allowance or ERA, protects a family’s assets for unexpected expenses such as illness and unemployment. The amount protected is based on the size of the family and six months of what average family expenses are in a survey called the Federal Consumer Expenditure Survey.

The other explanation is CESA or the Cumulative Education Savings Protection Allowance, which realizes the family’s need to save in order to help pay for school. The protection focuses on the amount of assets that would be equal to the amount said family would have saved if they set aside a specific amount of family income each year for each child. Essentially it is a plan to prevent the family’s EFC from increasing because the family faithfully put money away for school.

To provide even more assistance, low-income families are given more asset protection. Low Income Asset Allowance recognizes that a family with very low income needs additional asset protection because that family may need to draw on assets to cover basic living expenses

Only a small portion of a family’s net assets is expected for college expenses. Assets are assessed using a graduated rate structure as is income. IM asks families to contribute 3 % of the first $25,000 of their net worth (total asset worth minus appropriate allowances). If their net worth is higher, the additional assets are taxed at 4 %t and then at 5 %.



See: [Institutional Methodology (IM)](http://www.financialaidjournal.com/archives/FAJIss6.php)

The emergency reserve allowance for a family of 2 for the 2010-2011 school year was $22,330, for a family of 3 was $24,560. (Note that family size includes the college student as well as the parent – so under IM instead of counting up parents we are counting all family members – if you have a younger child as well as the college student that would increase your allowance. The minimum educational savings allowance that year was $23,130 – so as a single parent, IM is exempting at least $45.5K of your assets from consideration.

Some of these numbers come from the book “Paying for College Without Going Broke” – I didn’t have this book when my kids were in college, but based on just the excerpt I’ve now read, it looks like a good book to have. At least it will help you figure out what the right things to stress over are, and to avoid stressing out over the wrong things.

The FAFSA only schools rarely (if ever) promise to meet full need, so the difference in income protection allowance might not be all that significant in any case. I mean, that discrepancy at age 50 translates to about $1800 in EFC, as the federal formula taxes assets at 5.6%. So lets say that your EFC is $10,000, but if you had the same asset protection as a married couple it would be $9,200 – but your kid wants to attend a college with a $45K COA and the college offers a grant of $25K, reducing overall COA to $20K. It doesn’t reall matter what your EFC was in that situation, because the college expects you to pay far more in any cases.

I do think that any full need school is going to be using IM – though of course a FAFSA only school might provide full need to some, if not all, of its students – but even meeting “full need” can mean different things at different schools, depending on how much of a “self-help” (loans and earnings) burden they shift to the student.

P.S. I don’t think this stuff is “fascinating”… just frustratingly convoluted. But I do happen to have a law degree, so I’ve seen a lot worse in my time.