Education Funds JarParents often worry about how the money they have saved for college, retirement or other financial goals will hurt their student’s chances for financial aid.

In many cases, the money you have saved will have little or no impact on whether your child will qualify for financial aid. 

Parents who are overly anxious about the impact of their savings on financial aid can actually hurt their own finances by making moves that can be more costly in the long run.

Why assets usually don’t hurt aid chances

Despite what you might have heard, the more money you save for college, the more options you will enjoy. Saving for college and stashing away as much as you can is a smart idea.

Here are the top reasons why saving money for a bachelor’s degree will rarely hurt your financial aid chances:

  1. The financial aid formulas assess parental assets at a very low rate and even then some of this money is shielded from the financial aid formula.

  1. Parental income is a much bigger factor in determining who receives financial aid than savings. The number of students in college is usually a significant factor too.

  1. Most schools give merit aid so even if your income/assets eliminate your chances for need-based aid, it’s unlikely that you’ll pay full price.

What the aid formulas Ignore

You might find it surprising how many assets are not considered by the Free Application for Federal Student Aid, which millions of families seeking financial aid fill out annually.

The FAFSA doesn’t even ask about these assets:

  • Traditional Individual Retirement Accounts

  • Roth IRAs

  • SEP-IRAs

  • 401(k)s

  • 403(b)s

  • Other qualified retirement accounts

  • Annuities

  • Cash value in life insurance

  • Home equity in primary home

Assets that the FAFSA counts

  • College savings: 529 and Coverdell accounts

  • Nonretirement investment accounts

  • Savings/checking accounts

  • Equity in investment properties

  • Children’s savings/checking investment accounts

  • Custodial accounts

529 Accounts and Financial Aid

Parents seem particularly anxious about how their 529 savings accounts might hurt their aid chances. However, 529 assets, just like all of a parent’s nonretirement assets, are assessed at a low rate.

The federal formula assesses parental non-retirement assets at a maximum of 5.64%.

FAFSA Example:

Fifty-year-old parents have $75,000 combined in a checking account and nonretirement accounts, including a 529 college savings plan. Here is how the federal formula would assess this money:

$75,000 (parent assets) x 5.64% (aid multiplier) = $4,230

In this example, the eligibility for financial aid would appear to drop by $4,230.

There is, however, another step in the formula. Aid eligibility wouldn’t shrink as much because the FAFSA formula automatically shields some nonretirement assets from the calculation.

How much can be sheltered will depend on the age of the oldest parent as of the last day of the year. The older the parent, the greater the asset protection.

The U.S. Department of Education provides the asset protection amounts in its annual document called EFC Formula.

Here is the latest document: EFC Formula 2018-2019. In this document, you will see all the factors included in the FAFSA formula.

You’ll see how much parents can automatically shield in the chart (on page 19) entitled, Parents’ Education Savings and Asset Protection Allowance.  

I used the asset protection amount in the chart for married 50-year-old parents.

$75,000 - $22,300 (asset protection for 50-year-old parent) = $52,700

$52,700 x 5.64% = $2,972

In this case, the parents, who had saved $75,000 would only see their aid reduced by $2,972.

Having $75,000 available is far more valuable than being eligible for an extra $2,972 in aid. As a practical matter, that extra aid could end up being in the form of loans.

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