As the year draws to a close, many families find themselves reflecting on competing priorities. College decisions may be coming into focus for a child, while retirement planning remains a central long-term goal. These two paths often overlap, creating understandable questions about affordability, financial aid, and how to make thoughtful choices without compromising future security.
One of the most common sources of confusion in this process is the FAFSA, or Free Application for Federal Student Aid. Despite its importance, FAFSA is often misunderstood, leading families to overestimate its complexity or underestimate its value. A clearer understanding can help families approach college planning with greater confidence and alignment. Here we address some FAFSA FAQs.
How Does the FAFSA Work?
FAFSA is the primary form used to determine eligibility for federal student aid and is also used by many colleges as part of their own financial aid and admissions processes. Some institutions, particularly more selective schools, also require the CSS Profile, a separate application used to collect additional financial information beyond what FAFSA requires. Both forms generate a calculation known as the Student Aid Index, which colleges use as a starting point when evaluating financial aid.
It’s important to remember that FAFSA is not a one-size-fits-all verdict on what a family can afford. Instead, it creates a standardized framework that colleges interpret differently, depending on their resources and policies. This is why families with similar financial profiles may receive very different aid offers from different schools.
What Does FAFSA Actually Consider When Calculating Aid?
One of the most persistent misconceptions about FAFSA is that assets drive the outcome. In reality, parental income plays a much larger role. Under the current formula, parental income is assessed at approximately 47 percent, while most parent assets are assessed at just 5.64 percent.
This distinction matters. Many families worry that saving for college will significantly reduce aid eligibility, but assets generally have a limited impact compared to income. Retirement accounts such as 401(k)s and IRAs are excluded entirely, as is the value of a primary residence. These exclusions reflect an understanding that long-term financial security should not be undermined to fund education.
Can 529 Plans or Family Situations Impact FAFSA Results?
College savings plans, particularly 529 plans, are often misunderstood. Although these accounts are intended to be used fully for education, they are treated as parent assets and assessed at the lower rate of 5.64 percent. This means families are not penalized for saving early and consistently. Over time, the growth potential of a well-funded 529 plan typically outweighs its modest FAFSA impact.
Similarly, attempts to “opt out” of FAFSA rarely succeed. Parents cannot remove themselves from the application by not claiming a student on their taxes, and most students do not qualify as independent under federal definitions. Families with multiple children in college may also be surprised to learn that FAFSA no longer meaningfully adjusts for this, requiring a separate application for each student with parental income assessed each time.
Understanding these rules helps families avoid unnecessary financial maneuvering and instead focus on planning strategies that truly support their broader goals.
Should High-Income Families Still Complete the FAFSA?
Even families who are confident they will not qualify for need-based aid should strongly consider completing the FAFSA. Many colleges use it when awarding institutional or merit-based aid, and some consider completion as part of the admissions review process. Completing the FAFSA keeps options open and avoids unintentionally limiting opportunities.
FAFSA is also the gateway to federal student loans, which are available to all students regardless of income. These loans come with defined borrowing limits and do not require a parent co-signer, helping students build financial responsibility without excessive debt.
Integrating College Planning Into Your Broader Financial Strategy
At Grunden Financial Advisory, Inc., we view college planning as part of a broader financial strategy. The goal is not to chase formulas, but to understand how education funding fits alongside retirement planning, cash flow needs, and long-term priorities. Precision and clarity allow families to make informed decisions that support both generations.
For families seeking deeper insight, our recent webinar with college planning expert Cozy Wittman offers a practical discussion on how financial aid works, what FAFSA considers, and how to approach college decisions with perspective.
With the right information and a thoughtful plan, families can move forward knowing their choices today are supporting both their children’s futures and their own.
