Interest earned on bank and investment accounts throughout a year is reportable on a student’s Free Application for Federal Student Aid, or FAFSA. Students file FAFSAs annually, based on the prior year’s income tax return. Both interest income earned by the student and, if the student is financially dependent on his parents, interest income earned by the student's parents, is considered for financial aid eligibility. The greater the interest income, the greater the assets associated with the interest. This translates into less grant and scholarship offerings and more loan offerings for financial aid.
Effect on Eligibility
All interest income reported on the FAFSA impacts the student’s ability to pay for college and is included in the determination of eligibility for federal and state financial aid. Although the dollar value of interest income is important, the bank and investment accounts related to the interest income also impact the determination of eligibility.
Individuals receive Form 1099-INT by January 31 and use the form to report interest income earned on bank and investment account balances on their tax return. The bank and investment account balances associated with Forms 1099-INT are reported on the FAFSA. These balances include the interest earned throughout the year.
Interest income from municipal bonds is earned tax free. It is reported, but not taxed, on the individual’s income tax return. This tax free interest is reported as an individual line item on FAFSA. The dollar value of bond interest reflects the dollar value of bonds held by the individual. In terms of financial aid, whenever greater assets, such as bonds, are reported, less financial aid will be offered since the student has a means to pay for the expenses.
Security deposits on home and apartment rentals are held in bank accounts that collect interest. This interest income is held in the bank account until the tenant moves out, at which time the landlord either uses the security deposit for repairs or refunds the original security deposit plus interest earned to the tenant. Interest income earned on security deposits is reported on the FAFSA even though the individual does not have control over the bank account.
Parent Interest Income
Students who are dependents of their parents for financial aid need to report interest income on their parents' bank and investment accounts as well as their own accounts. This interest is included in the reported balances for the bank and investment accounts.