To seek financial aid for children's college tuition, I report income and assets on the Free Application for Federal Student Aid (FAFSA). Should I list my stock grants? At what value?
As long as the student is considered a dependent of the parent for the purposes of financial aid, the parent does have to report stock options in the FAFSA (http://www.fafsa.ed.gov). In the form's section for parents' financial information, a question asks: "As of today, what is the net worth of your parents' investments, including real estate? Don't include the home in which your parents live." 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.
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. 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%.
The FAFSA Rules On Income And Asset Information
The FAFSA requires you to report your assets as of the date of application. However, in 2016, the FAFSA rules for reporting income changed. Instead of using income from the year before college enrollment, it now uses income from the year preceding the year before enrollment. In other words, students' financial-aid eligibility is currently based on income from two years before they start college, not one year before. Therefore, stock compensation that is taxable in the current year will affect eligibility for financial aid two years from now.
Example: Taxable stock compensation recognized in 2021 will affect eligibility for financial aid in the 2023–2024 academic year. If your child will start college in 2023, you will use 2021 income-tax information when you file the FAFSA in the fall of 2022.
Sometimes called the "prior-prior year" approach, this method allows FAFSA-filing to start in October, as opposed to January of the following year. Instead of estimating income on the FAFSA, you report numbers from a tax return that has already been filed. You then file a new FAFSA for each subsequent year of college under the same rules, as your income changes. Hopefully, this rule modification will allow colleges to tell students earlier about their financial-aid packages.
Troy Onink, a financial advisor with expertise in college funding and stock plans (now deceased), contributed to this answer. To read more about financial-aid strategies for stock compensation and strategies to fund education with company stock, see his articles elsewhere on this website.