Q: My kid sister has some investment accounts. Does this decrease her chance of getting financial aid for college? --B.R., via the Internet

A: Kudos to your kid sister! She's started investing early. She's well on her way to intelligent financial security if she simply understands the value of time and invests her money Foolishly. And why, may we ask, did you not ask this for yourself? Did you forget to invest? Is your kid sister teaching you a thing or two? Hmmm? Kids these days.

All right, enough guilt. Let's get to the answer. Federal financial aid is based on a couple of questions and a simple subtraction. The questions: 1) What is the cost of the university or college? 2) What is your family's expected contribution? Subtract the expected contribution from the cost, and you arrive at your financial aid eligibility.

Sounds simple enough, but the rub is in that middle phrase -- the expected family contribution, or EFC (yes, they even have an acronym for it). How is that calculated? Well, it's based on an analysis of your family's income and assets. Two methodologies are generally used: the FM (another acronym!), or federal methodology, and the IM (you guessed it -- yet another one!), or institutional methodology. The latter is for private, nonfederal student aid funds. The IM takes home equity into account and includes a minimum expected contribution from the student, but it also allows the parents more leeway in regard to items such as medical and dental expenses, elementary and secondary school tuition paid, and child support paid.

The information used for FM analysis is collected on the free application for federal student aid (FAFSA -- yikes!). Item No. 50 on said FAFSA form asks for your "current net worth from investments." Question No. 73 asks the same thing about your parents. So if Sis has a pile of stocks worth a million bucks, then yes, it's going to affect her eligibility for financial aid. (If she has a million bucks, shame on her for applying -- and for not sharing it with you!)

Not only that, but these things are weighted differently depending on where the assets reside. Financial aid offices would expect her to use up to 35 percent of her assets toward her education expenses each year. They'd expect the parents to only use around 6 percent of their assets. Thus, if the investments are held in the student's name, then a higher proportion of them must likely be used before aid or loan dollars become available. While this information is certainly useful, Fools don't think it should be reason enough to discourage anyone from investing from as early an age as possible. The idea here is that you're given a needs-based allowance for financial aid. If you need it, you should get it. To the extent that you don't need it, let someone else have it.

WHAT NOW?: Would Sis (SIS) like to find out how much aid ($$) she might qualify for? Would she like to do this online (OL)? Point her (PH) here. It's from the college board (CB) online, and lets her calculate both the FM and the IM. Over and out (OO)!

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