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Life Events: College Funding

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Funding Your Child's College Education With Stock Options And Other Stock Grants (Part 1)

Troy Onink

Surprisingly, very little has been written about paying for college expenses through the use of stock options, employee stock purchase plans, restricted stock, and other equity grants. In fact, however, your ability to pay for college, and ultimately have more money for retirement, may rest on your company's stock plan and related financial planning.


Your ability to pay for college, and have more money for retirement, may rest on your company's stock plan and related financial planning.

Part 1 of this series helps you understand the impact that equity grants have on financial aid eligibility. Part 2 covers the gift tax rules and the effect of the tax treatment on your strategy. Part 3 looks at the so-called "kiddie tax" and at specific strategies for using stock grants and tax credits to pay for college.

Financial Aid Basics

Need-based student aid is awarded on the basis of financial need and comes in the form of work-study, student loans, grants, and scholarships. Need-based aid is awarded to students who demonstrate a need for aid based on the following formula:

cost of attendance (COA) –
expected family contribution (EFC) =
financial need

This financial need is reduced by any merit-based aid and scholarships that the student receives. Your EFC is determined by completing the FAFSA (Free Application For Federal Student Aid) and submitting it to a processing center (online or in hard copy), where the information about you and your child from the FAFSA will be entered into the Federal Methodology Need Analysis Calculation. (An EFC calculator is available at the website CollegeBoard.com.)

If your child has enrolled in a college whose yearly cost of attendance is $35,000 and your expected family contribution (EFC) is $21,000, then your child demonstrates a need for aid in the amount of the difference, or $14,000. The financial aid officer at the college will then try to fill that need with a package of work-study, student loans, grants, and scholarships that your child is eligible for from the college, state and federal governments, and private organizations.

Likelihood Of Receiving Financial Aid


Financial aid eligibility is based not just on the income of parents and students but on their assets as well.

The estimated average overall cost of a four-year public college in the United States for the 2013–2014 academic year is $26,000 per year; four-year private colleges in the US average $50,000 per year. According to the 2014–2015 Federal Methodology Formula to calculate financial need for student aid, a family of four that has one college student and no assets, doesn't make contributions to a qualified retirement plan, and files a joint tax return on $130,000 of adjusted gross income (or more) will typically not qualify for need-based student aid at the average four-year public college ($26,000). The same family with $190,000 of adjusted gross income will typically not qualify for need-based student aid at either a public or a private college ($50,000). Based solely on these levels of income, the family's expected contribution towards the cost of attendance (COA) will exceed the corresponding cost of attendance at both public and private colleges, and the student will not be eligible for need-based student aid.

Eligibility for need-based financial aid at the income levels referenced above applies to families with only one child in college. When parents have two or more children in college their portion (parental contribution) of the expected family contribution (EFC) gets split among all of the children in college, in which case one or all of those children may qualify for some need-based financial aid. Therefore, for financial-aid purposes, having twins in college at the same time can be more beneficial than having two children in college five years apart.

Role Of Stock Compensation In Financial Aid Calculation

However, financial aid eligibility is based not just on the income of parents and students but on their assets as well. Your EFC is increased by some percentage of your assets, reducing your calculated financial need. Question 40 in the student section of the 2014–2015 FAFSA asks:

As of today, what is your total current balance of cash, savings and checking accounts?

Question 41 asks:

As of today, what is the net worth of your investments, including real estate (not your parents' home)? Net worth means current value minus debt.

Accordingly, parents answer the same questions in their section of the FAFSA on Lines 89 and 90, respectively.

The FAFSA defines investments thus:

Investments include real estate (do not include the home you live in), trust funds, UGMA and UTMA accounts, money market funds, mutual funds, certificates of deposit, stocks, stock options, bonds, other securities, installment and land sale contracts (including mortgages held), commodities, etc.

Investments also include qualified educational benefits or education savings accounts such as Coverdell savings accounts, 529 college savings plans and the refund value of 529 prepaid tuition plans. For a student who does not report parental information, the accounts owned by the student (and the student's spouse) are reported as student investments in Question 41. For a student who must report parental information, the accounts are reported as parental investments in Line 90, including all accounts owned by the student and all accounts owned by the parents for any member of the household.

The FAFSA instructions further explain:

Investments do not include the home you live in, the value of life insurance, retirement plans (401(k) plans, pension funds, annuities, non-education IRAs, Keogh plans, etc.) or cash, savings and checking accounts already reported in Question 40 (for students) and Line 89 (for parents). Investment value means the current balance or market value of these investments as of today. Investment debt means only those debts that are related to the investments.

For the most part, all non-retirement savings and investments will count against the parents at a maximum rate of 5.64%, including all vested options and grants that are in the money (i.e. the exercise price is lower than the market price). Thus, vested options and grants that are in the money reduce your eligibility for need-based student aid.


Vested options and grants that are in the money reduce your eligibility for need-based student aid.

According to informal discussions with the Department of Education, the value that should be reported is the net value (after fees, commissions, taxes, etc.) of all types of vested stock options as if they were exercised and sold at market value on the day the form was completed. (For stock options, the value is just the spread, not the face value of the grant before exercise costs.) The same rules probably apply for employee stock purchase plans, restricted stock, and stock appreciation rights.

Reportable assets in the student's name are counted against them at a rate of 20% of the total net asset value when you file the FAFSA for the 2014–2015 academic year (the 2014–2015 FAFSA deadline is June 30, 2014). However, 529 college savings, 529 prepaid assets, and Coverdell Education Savings Accounts (ESAs) that are owned by the child are not counted as an asset of the student, but rather as assets of the parent(s) and assessed at a rate as high as 5.64%. (To learn additional details about the impact of investments and capital gains on eligibility for financial aid, see my article in Investment News.)

Asset Protection Allowance

Fortunately, parents receive what is referred to as an Asset Protection Allowance, which usually amounts to about $45,000 for a married couple in their mid-40s. The Asset Protection Allowance is an amount of "reportable" assets that do not count against you when you complete the FAFSA.

Example: You have in-the-money vested options with a market value of $200,000. You have an Asset Protection Allowance of $45,000. Thus $155,000 will count against you at 5.64%, or $8,742, and so your student's aid eligibility decreases by $8,742. Assets in the student's name that are reportable on the FAFSA are assessed at 20% from the very first dollar because, unlike with parents, there is no asset protection allowance for students.

Compensation Income From Stock Grants

The FAFSA is one aid form, but it is based on information from two years:

  • assets that you have in the current year
  • income from the previous year

The FAFSA requires information on your assets as of the day you complete the form, but the income questions pertain to your income from the previous year. Therefore, you use today's asset information and last year's income information when completing the FAFSA. This can work against you because the income from your equity compensation in 2013 will be reflected in your 2013 tax return, and your 2013 tax return is the source of the information to answer the income-related questions on next year's FAFSA (2014–2015). In addition, the equity compensation income that was reported on your 2012 tax return is now an asset too if you still have the cash proceeds or if you continue to hold the stock.


When reporting your current assets for this year on the form, make sure you use a current statement of your equity grant holdings to exclude options that you exercised last year and restricted stock that vested last year.

The only way to prevent cash proceeds from the stock sale from being counted as an asset on the FAFSA is putting them into an annuity or a life insurance policy in the parents' names or the student's name. If the proceeds are put into a 529 college savings or prepaid plan, the value of the account will be trusted as an asset of the parent, regardless of whether the parent or the student is the owner, and will thus count against the student's aid eligibility at up to 5.64% of the account's total value.

Using the example from above, if you have $200,000 in vested options, those options will count against you as an asset this year. In addition, if you also had income during the previous year from options that you exercised or from restricted stock that vested, that income will have to be reported on the FAFSA this year and will count against you in the income portion of your expected family contribution.

With incentive stock options (ISOs), when you exercise and hold the stock through the tax year that is used to report your compensation for your FAFSA, you have no income to report for the exercise. (See the section ISOs: Taxes for details.) However, the ISO stock itself will show up on the form as an investment asset. Nonqualified stock options (NQSOs), in comparison, always trigger income at exercise, as restricted stock does at vesting.

On the FAFSA, as income increases, aid eligibility decreases. When reporting your current assets for this year on the form, make sure you use a current statement of your equity grant holdings to exclude options you exercised and restricted stock that vested last year. This will prevent double-counting them as both last year's income and this year's assets. If you continue to hold that stock, then it should be included like the value of any stock you own.

Next Article

Part 2 explains the basics of gift tax and introduces specific strategies for using stock grants to pay for college.

Troy Onink is the CEO of Stratagee.com, a college-planning firm that provides college-funding advice to families, along with software and consulting services to financial advisors. Troy is also a contributor to Forbes, where he writes a widely followed blog, College Crossroads. This article was published solely for its content and quality. Neither the author nor his firm compensated us in exchange for its publication.


People who read this article also read:
Ten Financial-Planning Rules Everyone With Stock Options Needs To Know
How To Avoid The Most Common Stock Option Mistakes (Part 1)
Retirement Planning With Stock Options, Restricted Stock, And Other Stock Compensation (Part 1: Pre-Retirement Planning)
Funding Your Child's College Education With Stock Options And Other Stock Grants (Part 2)
Funding Your Child's College Education With Stock Options And Other Stock Grants (Part 3)