How Student and Parent Income Affect Your Financial Aid - COLLEGEdata - Pay Your Way

How Student and Parent Income Affect Your Financial Aid

Student and parent income is a big factor when colleges hand out financial aid. But only some income counts. You'll thank yourself later if you take a few minutes to check it out now.

Most colleges rely on the FAFSA's aid formula to allocate portions of student and parent income to college expenses. Here are the main sources of income this formula counts—and doesn't count.

Common Income Counted in the FAFSA Formula

Colleges using the Free Application for Federal Student Aid (FAFSA) allocate 50 percent of eligible student income to cover the upcoming year of college expenses, and between 22- 47 percent of eligible parent income. If parents are divorced, the FAFSA asks for financial information about the parent (and stepparent) with whom the student lived most of the time. Here are the most common sources of income counted by the FAFSA.

  • Income from work, except work-study income
  • Proceeds from asset sales, dividends, and capital gains
  • Retirement fund withdrawals
  • Untaxed income, such as elective retirement fund contributions and money spent by non-parents on the student's behalf

Common Income Not Counted in the FAFSA Formula

Some income earned by parents and their dependent student is protected (not counted) to allow for minimal living expenses and payment of taxes. The income protection allowance changes each year. Currently, the FAFSA protects dependent student income up to $6,420. For parents, the allowance depends on the number of people in the household and the number of students in college. For 2017-2018, the income protection allowance for a married couple with two children in college is $24,480.

Other common sources of uncounted income include

  • Loan proceeds
  • Financial aid grants and scholarships used for college expenses
  • Withdrawals from 529 college savings plans
  • Portions of money paid for student loan interest, and tuition and fees

When No Income Is Counted

Under certain conditions, no income is counted. To be eligible, the family must have no more than $25,000 in income, file the 1040A or 1040EZ tax forms, and have received a federal benefit over the previous two years.

The AGI Shortcut

To assess taxed income, the FAFSA uses the adjusted gross income (AGI) reported in your tax return. It uses the tax return from two years prior to the date the student plans to enroll in college. If you allow the FAFSA's IRS Data Retrieval Tool to access your filed tax return, the FAFSA will automatically gather your AGI.

What's Next?

Note: Financial information provided on this site is of a general nature and may not apply to your situation. Contact a financial or tax advisor before acting on such information.