Will Saving for College Hurt Your Financial Aid Chances?
Will your investments hurt your chances for financial aid?
Many parents worry about this, but investment accounts rarely impact financial aid awards. It’s been estimated that only 7% of families who complete aid applications are penalized for their savings.
Reasons Why Savings Rarely Matters
Here are two big reasons why your investments, as well as college accounts, such as 529 plans and Coverdell Education Savings Accounts, will usually not hurt aid awards:
1. Colleges don’t care how much you saved for retirement.
The Free Application for Federal Student Aid(FAFSA), which anyone applying for financial aid will complete, doesn’t even inquire about retirement accounts. Private colleges that use theCSS/Financial Aid PROFILE will ask about a family’s retirement accounts, but these schools very rarely penalize parents for these assets.
2. Parents can also shelter money outside of retirement accounts.
It might not seem like it, but colleges don’t want to strip you of all of your available cash. The federal financial aid formula will also let you shield a chunk of your non-retirement money through something called an asset protection allowance.
As you can see from the federal chart below, how much you can shield from the FAFSA formula depends on the age of the oldest parent. The closer the parent is to retirement age, the greater the amount he/she can shield from the financial aid formula.
Let’s say the oldest parent is married and 52. The family would be able to shield $43,100 in 529 savings plan money, as well as any other cash in taxable accounts such as savings, checking and brokerage accounts.
The amount a mom or dad could shelter in a one-parent household is significantly less. A 52-year-old single parent, for instance, could shelter just $12,500.
How the Asset Allocation Works
Using an example should make it easier to see how this allowance would work. Let’s assume that a family has $100,000 in non-retirement assets, including some cash in a 529 savings plan, and the oldest parent is 52.
The family would get to shield $43,100 from the FAFSA formula, which would leave $56,900 unprotected. In calculating the family’s financial need, the FAFSA methodology wouldn’t expect the parents to sink all of that money into college. Consequently, the remaining $56,900 in assets would be assessed at the parental rate of 5.46%.
When you do the math, the child’s eligibility for need-based aid would drop by only $3,209 even though the family had $100,000 in the bank.
After seeing this example, would you rather be a family who has $100,000 in savings or would you rather be eligible for an additional $3,209 in aid, which likely would come in the form of loans?
It’s always better to save money, whether it’s for college or retirement. Do so and you’ll enjoy more options.