“How will rental property impact our student’s financial aid?” This is a question I often hear from parents at this time of year. Normally they are referring to investment property such as the rental of farm land or the rental of an apartment or a house. How will this be treated? Rental property will have an impact on your ability to afford college.
There are three main distinctions with regards to rental property that one needs to be aware of: Ownership, Net Income and the Net Worth of the asset.
In most cases, when a student (under age 24 and single) is filing the FAFSA, they will be considered a dependent of the parent(s). Whoever owns the property must report the net income generated and the net worth of the asset on the FAFSA (Free Application for Federal Student Aid). In most cases, the owner will be the parent.
The owner has to report the net income on their respected “Step” of the FAFSA (either Step 2 for the dependent student or Step 4 for a parent). This information will be found on the corresponding tax return. Depending upon how the asset is structured in one’s filing, it is typically found incorporated on the IRS 1040, coming from a Schedule – such as an IRS Schedule K or IRS Schedule C.
The net worth of the asset is determined by subtracting the debt associated with the property from the currently market value. This value will then be part of the formula which determines your Expected Family Contribution. In the case of the FAFSA, the formula is known as the “Federal Methodology”. This will be asked again in the corresponding steps on the FAFSA.
I wish I could give you a very simple answer to the impact that rental property will have on your student’s financial aid offer. However, it is not so simple. The correct and accurate answer is: it depends. The three main factors that will determine the impact of rental property on your student’s financial aid offer will be: your household’s overall income; the amount of assessable assets reported; and the school that your child will be attending.
As a general rule, rental property will reduce the amount of financial aid your student will be eligible for. When I use the word “reduce”, I mean that it may lower the amount of student aid eligible, or result in less favorable terms, such as a higher interest rate. In many cases, it reduces the amount of scholarships as well. The important point to remember with regards to rental property is that it does not function within a vacuum. It is a part of the whole, bigger picture which every household must understand..
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