Why Saving for College Rarely Hurts Financial Aid Chances
Many parents worry that their children won’t qualify for financial aid, but that usually is not a problem.
Here is why you probably won’t need to fret about this:
Colleges don’t care about retirement savings.
The vast majority of private and public colleges and universities don’t even ask about a household’s retirement accounts. This would include all qualified retirement accounts such as Individual Retirement Accounts and 401(k) plans.
The Free Application for Federal Student Aid (FAFSA) that many colleges require, doesn’t even include a question about retirement assets. (A common mistake that parents make is to include retirement assets on the form.)
Nearly all schools use the FAFSA exclusively. Roughly 200 colleges, almost all private, use a secondary financial aid application called the CSS Profile. The Profile does inquire about retirement assets, but schools rarely penalize families for them.
Parents can also shield some non-retirement assets.
The financial aid formulas automatically allow parents to shield some of their non-retirement assets from aid calculations.
The FAFSA shelters an amount based on the age of the oldest parent. For instance, let’s assume the oldest parent is 50. According to the federal formula, a married couple would be able to shield $22,300 in non-retirement money, including 529 college accounts. If the oldest parent is 55, the asset allowance increases to $25,400.
The CSS Profile formula also includes an asset allowance. The Profile, which is a product of the College Board, does not publicly share its asset allowance formula.
Parental assets are assessed at a low rate.
Even parents who have saved a significant amount of money in college accounts or other non-retirement assets will typically see a minimal impact on their chances for need-based financial aid.
The FAFSA assesses parent assets at no more than 5.64% while the Profile assesses parent assets at no more than 5%.
Here is an example of how that would work using a 50-year-old couple.
The parents have saved $100,000 for college in a 529 account.
When you subtract their allowance of $22,300, the family will have $77,700 subject to financial aid calculations.
Here is how the FAFSA would assess this:
$77,700 X 5.64% = $4,382
The figure represents the potential reduction of need-based financial aid that a student could qualify for.
Clearly, it’s vastly better to have $100,000 saved for college!
Teenage assets weigh more heavily.
It’s smart to save for college in the parent’s name rather than the child’s name. A student’s assets are assessed at 20% (FAFSA) and 25% (Profile). Student assets include money in checking/savings accounts, as well as custodial UGMA and UTMA accounts. The good news is that 529 accounts are considered parental assets.