Many families worry that their college savings accounts will kill their chances for financial aid.

It’s been my experience that it’s usually dads who get stressed out about how colleges will treat their college accounts for financial aid purposes. Some fathers whom I’ve talked are down right bitter. They are especially incensed at the possibility that families that didn’t set aside money for college will hog all the aid.

If that’s what you’re worried about, here’s my advice: Relax!

Families who save for college are rarely ever hurt in student financial aid considerations. In fact, it’s been estimated that fewer than 4% of families who fill out financial aid applications are penalized for their savings.

Why Your Savings Won’t Hurt Financial Aid Chances

Here are the two biggest reasons why saving money shouldn’t hurt your financial aid chances:

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 the CSS/Financial Aid PROFILE, will inquire about a family’s retirement accounts, but schools that use the PROFILE very rarely penalize parents for these assets.

2. Parents can also shelter plenty of 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 financial aid formulas will also let you shield a big chunk of your non-retirement money through 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 52. The family would be able to shield $49,200 in 529 savings plan money, as well as any other cash laying around in taxable accounts such as savings, checking and brokerage accounts. In a two-parent household, a 60-year-old parent could shelter $61,400 from financial aid calculations.

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 $16,700.

Asset Allowance Illustration

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 $25,000 in a 529 savings plan, and the oldest parent is 55.

The family would get to shield $53,400 from the FAFSA formula, which would leave $46,600 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 $46,600 in assets would be assessed at a parental rate of 5.46%. When you do the math, the child’s eligibility for need-based aid would only drop by $2,628 even though the family had $100,000 in the bank.

Knowing this, would you rather be a family who saved nothing for college or the family who has $100,000 in the bank? Obviously, it’s always better to save money, whether it’s for college or retirement. Do so and you’ll enjoy more options.

For parents who do have money to shelter from the federal aid formulas, 2012 did usher in some bad news. The amount of money that parents can protect has dropped. Last year, for instance, you could shelter $60,200, but the figure dropped to $53,400 this year. You can find the EFC Formula by Googling EFC Formula and 2012. You’ll find the right  chart on page 19.

Note:

When I have written about this before, some parents have believed that they subtract their asset protection allowance themselves before reporting their taxable assets on the FAFSA. Do not do this! The federal processing software automatically does this when determining what you EFC is.

Have Questions for Duke’s Financial Aid Director?

On Thursday at noon Eastern Time, Duke University’s director of financial aid will take viewer questions about paying for college. The conversation will include President Obama’s remarks in the State of the Union about student debt. Anyone can watch the webcast at no charge at http://ustream.tv/dukeuniversity. Questions can be emailed before or during the broadcast to live@duke.edu or tweeted with the tag #dukelive.

Lynn O’Shaughnessy is the author of The College Solution and She also writes a college blog for  CBSMoneyWatch and US News. Follow her on Twitter.

Join Me at My College Workshop on Saturday!

I will be holding a college workshop at the University of California, San Diego this Saturday (Feb. 4). At the Finding the Right College Workshop, you will learn specific strategies to increase your child’s admission chances, ways to evaluate colleges and universities, essential ACT and SAT information and what you need to know about  college rankings.

You can learn more here and sign up for the workshop here.

Read more on The College Solution:

How Hard Is It To Get Into College?

Qualifying for Financial Aid: How Wealthy Is Too Wealthy?

Don’t Fall for These 4 Financial Aid Myths

Many of the biggest misconceptions that people have about the college process revolve around financial aid. Now that we’re in the midst of financial aid season, I wanted to share  four  financial aid myths that are probably the most common.

1. I make too much money to qualify for financial aid.

You shouldn’t automatically assume that you won’t qualify for need-based assistance. How much income you earn is only one part of the equation. What also matters is the price of a particular college. For example, some families that don’t qualify for financial aid at moderately priced state schools may be in line for considerable help at pricey universities.

At Princeton University, for instance, families making between $160,000 and $180,000 qualified recently for an average of $26,450 in financial aid.

You can obtain an early assessment of whether your family might qualify for aid by using a free financial aid calculator. The calculator will produce an estimated Expected Family Contribution, which is what colleges would expect you to pay, at a minimum, for one year of school.

Here is the EFC calculator on the College Board website that I like to use.

Of course, you should ALWAYS use a net price calculator when evaluating your chances for need-based financial aid or merit aid for affluent students at specific  schools. See my previous post on this topic:

Playing Hide and Seek With Net Price Calculators

2. My home equity will kill my chances for aid.

Most colleges won’t care if you own a house and won’t count home equity against you if you do. That’s because the majority of schools rely on the federal aid application, the Free Application for Federal Student Aid (FAFSA), which doesn’t even ask parents if they own a home.

Colleges that use an additional form, the CSS/Financial Aid PROFILE , will inquire about a family’s home equity. With rare exception, however, these colleges will limit the amount of home equity they consider when they evaluate a family’s ability to pay. Colleges will typically impose a cap that rarely exceeds 2.4 times a family’s income, according to Paula Bishop, a smart CPA in Bellevue, Wash. who assists families with financial aid issues.

Here is the list of the 249 colleges and universities that use the PROFILE.

3. I have saved too much in my child’s college fund to qualify for aid.

In reality, less than 4% of American families who apply for financial aid are penalized for their savings. My post tomorrow will delve into this topic.

4. Completing financial aid forms is a waste of time.

Most families should complete financial aid applications, because without filing these documents, they will have no hope of receiving need-based aid nor will they be able to obtain federal college loans.

The FAFSA became available on January 1 for the 2012-2013 school year. The application should not take long if you gather the necessary documents before you sit down at your computer. You can find out what information you’ll need to complete the FAFSA by checking out the FAFSA on the Web Worksheet in advance.

The latest PROFILE is available every fall. While the FAFSA is free, the PROFILE costs $25 for the initial application and college report, and all additional reports are $16 each. Some low-income families will be eligible for fee waivers.

Join Me at My College Workshop on Saturday!

I will be holding a college workshop at the University of California, San Diego this Saturday (Feb. 4). At the Finding the Right College Workshop, you will learn specific strategies to increase your child’s admission chances, ways to evaluate colleges and universities, essential ACT and SAT information and what you need to know about  college rankings.

You can learn more here and sign up for the workshop here.

Lynn O’Shaughnessy is the author of The College Solution, an Amazon bestseller, and a workbook, Shrinking the Cost of College. Follow her on Twitter and Facebook.

The federal government has been trying for years to make the Free Application for Federal Student Aid less complicated.

It should get kudos for the effort, but millions of parents still mess up when tackling this financial aid form. But bless its heart, the federal government is trying, in what might be it’s biggest push ever, to make completing the FAFSA far less painless for the vast majority of families who wrestle with it.

What We’ve Been Waiting For

Here’s the big development, which has been years in the making: After you’ve filed your federal income taxes you can retrieve the tax information through something called the IRS Data Retrieval tool. Actually this tool was available a couple of years ago, but for reasons not worth getting into, most families weren’t eligible to use it.

With advances in IRS technology, this data retrieval tool should now be extremely helpful to most tax filers. With the click of a button, the tool will allow you to transfer your IRS tax return information to the FAFSA website to complete your financial aid form. The data retrieval feature is scheduled to be available beginning Feb. 1.

The Benefit of the New Tool

Completing the FAFSA with data directly from your IRS tax form is expected to not only make the process easier, but also cut down on errors, which should lead to more accurate financial aid awards.

If you aren’t already electronically filing your tax returns this will give you motivation to do so. That’s because once you file your tax return, the numbers in the return should be available for FAFSA purposes in one-to-two weeks. If you file a paper tax return, the data won’t be available for six-to-eight weeks.

For the first time, applicants, who indicate that they have already filed a federal tax return, will be directed to use the IRS tool. Applicants who haven’t filed yet, will be asked to use the tool once they have completed their 2011 federal tax return. The same goes for families who want to correct or update their filed FAFSA

This won’t be convenient for families who won’t get their taxes done until closer to the April 15 deadline. Unfortunately, parents typically can’t wait that long because schools often impose earlier deadlines for financial aid, as do many state aid programs.

If you file the FAFSA long before you complete your taxes, you can estimate the  FAFSA figures that require your tax return. Applicants, who estimate their taxes for the FAFSA must use the tool after they file their returns to update the financial aid application.

Who Is Eligible To Use the Tool

Here are the three criteria for using the tool:

• You must have a Social Security number
• You must have filed your 2011 federal tax return
• You must not have changed our marital status since Dec. 31, 2011

If you are married, but file separate taxes, you can’t use the data retrieval tool.

Some schools are requiring that families use the data retrieval system or are strongly recommending it.

I found a nifty tutorial on the Data Retrieval Tool on a California State University website, which I think you’ll find helpful.

Let’s hope this new tool will make everybody’s FAFSA experience a less stressful one this year!

More from The College Solution:

Measuring the Generosity of Colleges

How Does Financial Aid Work When You Are Divorced?

Financial Aid: Bait and Switch

My Upcoming College Workshop:

I will be holding my next two college workshops at the University of California, San Diego on Jan. 28 and Feb. 4. At the workshops — you can sign up for one or both – I aim to share with you ways to help you make smart decisions about picking colleges and making them more affordable. You can learn more here and sign up for the workshops here. Lynn O’Shaughnessy

Now that we’re in the thick of FAFSA season, I wanted to answer some questions on my college blog that I’ve been getting about financial aid forms. If you have your own questions, please leave them in the comment box below. Lynn O.

Mom’s question:

Try as I might I still can’t get my hands around the whole financial aid picture.  We completed the FAFSA and CSS/Profile and were amazed to see that the FAFSA family contribution amount was way more than we could actually afford! Does this mean that this is the lowest cost possible for schools with a larger price tag, merit scholarships included?

My son did apply to 2 private schools that use the institutional methodology, which I believe if admitted would give him the best financial packages.  My husband makes a good salary, but we are not homeowners and do not have much outside of our retirement plan.  Am I right about this?  Lastly, my son did apply to 1 state school that we could afford without financial aid.  At this point, we’re waiting to hear back from all the schools.

Answer:

Lots of parents are surprised when they discover what their Expected Family Contribution is. (If you don’t know what that term means, read my previous post:

What Is Your Expected Family Contribution?)

Experts have rightfully complained that the methodology used to generate EFC figures for millions of families is flawed. A family’s EFC isn’t always going to be fair. In fact, it’s quite likely that the EFC won’t pinpoint what a family can truly afford for college. And it’s no wonder. Congress decides what’s in the EFC’s secret sauce.

The formula does play favorites. The methodology, for instance, favors homeowners, aggressive retirement savers, small business owners, teenagers of divorce and rural Americans. That said, the biggest factor determining an EFC is usually the family’s income.

The FAFSA doesn’t ask if you own a home, which is great news for homeowners. Since you don’t own a home, this benefit won’t help you. The CSS/Financial Aid PROFILE does, however, ask about home equity.

Your EFC indicates what you will have to pay, at a minimum, for one year of college. Let’s say that you have an EFC of $40,000 and the school costs $40,000. That means you would not receive any need-based aid. Families with a high EFC, however, are eligible for merit scholarships from schools. For instance, the school might award a teenager a $12,000 merit scholarships, which would drop the cost from $40,000 down to $28,000. The vast majority of schools give merit scholarships to affluent students.

John’s Question

I have your book and enjoy your advice through that and other sources.  I wonder if you have any advice for someone who has very low current income but very high net worth. Our EFC is very high using the FAFSA (especially the Profile method) due to our taxable account balances and home equity.  It is close to full cost of most colleges.

Are there any schools that would not consider our assets but only income?

John

My answer:

Most schools exclusively use the FAFSA and the FAFSA does not ask about home equity of a primary home so that’s not an issue.

In addition,  if you have a lower adjusted gross income –  below $50,000 — you can qualify for something called the Simplified Needs Test, which doesn’t require that you disclose assets on the FAFSA. To be eligible for the Simplified Needs Test, you can’t file the regular federal tax return.  You must also be able to file a 1040a or 1040EZ tax form. Sometimes with high valued assets, however, capital gains could require that you file a 1040.

At some FAFSA-only colleges, however,  if you qualify for the simplified method, you will get federal aid (loans, work study and a Pell grant) for some of your award package since your EFC will be low, but for the school’s own institutional funds, (the good grant money that doesn’t have to be repaid), they look at the assets regardless of the simplified method.

While you might be able to avoid disclosing your assets on the FAFSA, you wouldn’t be able to do this on the PROFILE, which delves deeper into a family’s finances. The PROFILE is used by 249 schools that are almost all private. The five state schools that use the PROFILE for undergrads are:

• University of Virginia
• University of Arizona
• University of Michigan
• University of North Carolina
• College of William and Mary

Barry’s Question:

How about a post on the FASFA and financial aid for returning students?

Our daughter is in the middle of her first year at Oberlin, so we went through FAFSA and the whole financial aid process last year. Your blog was a big help!  Now, we are filling out our FAFSA again and while we are more experienced, there are some new wrinkles for a returning student. For example, our daughter received a generous academic merit scholarship that is guaranteed for her four years (as long as her grades are up). She is also doing federal work/study with a job on campus.

There is a section of FAFSA which asks for the student’s financial information and has a couple of questions about work study and any scholarships received that “were reported to the IRS” or some such language. This worried us until we called the college fin aid department and they explained that we did not need to fill in the scholarship received from the college itself, but we did need to report our daughter’s earnings (only a bit over 1k) in the federal work/study program.

Anyway, just an idea for you to consider.

Barry

Answer:

Thanks for the idea Barry. All work-study earnings are taxable income and must be reported as such. Students are supposed to report work-study earnings in the FAFSA’s Additional Financial Information section. The good news is that work-study earnings are excluded when determining a student’s financial need.

And just as Oberlin told you, institutional scholarships from the college should not be reported on the financial aid form.

San  Diego College Workshop

Time is running out to sign up for my next two college workshops at the University of California, San Diego on Jan. 28 and Feb. 4. At the workshops — you can sign up for one or both – I aim to share with you ways to help you make smart decisions about picking colleges and making them more affordable. You can learn more here and sign up for the workshops here. Lynn O’Shaughnessy

It’s FAFSA season so I’m going to devote at least a couple of college blog posts this week to financial aid forms.

The post today was actually written by Michael Szarek, an independent college counselor with Counseling for the Rest of Us in New Jersey.

If you have any questions about the FAFSA or CSS/Financial Aid PROFILE, just share them with us in the comment box below. I’ll try to answer them this week.

22 Facts About The FAFSA

1) The FAFSA is THE form required at all colleges that accept and award federal aid.  (Yes, there are a few that do not participate in the federal financial aid system, but these schools are rare. )

2) It’s the form that provides your college financial aid officers with the information they need to go ahead and create your financial aid package.

3) FAFSA stands for FREE Application for Federal Student Aid.

4) Hence, it’s FREE.

5) It’s available online at www.fafsa.ed.gov.  NOT dot com, NOT dot org, NOT dot anything else.

6) You can still get a paper version, if you really, really, really want to.  But you don’t.

7) It utilizes a July-to-June calendar.  In other words, we are in the middle of the 2011-2012 year and “New Year’s Day” is July 1, when we move to the 2012-2013 year.

The 2012-2013 form is available for processing on January 1, 2012.

9) The FAFSA helps determine the awarding of over $150 billion in federal aid, as well as state aid.

10) The majority of colleges also use the FAFSA to determine who qualifies for their own institutional need-based aid.

11) If you have your 1040 income tax return available, the form can be fairly straightforward.

12) Do not pay someone $1500 to fill the form out for you to “maximize your aid potential”.  Generally, the only one receiving more aid in that situation is the preparer.

13) The FAFSA is based on your current household and your current assets. What you’ve got in the bank and investment accounts on the day you complete the FAFSA.

14) But the FAFSA wants to know about last year’s (2011) income for your household.

15) If your parents are divorced or separated, it’s based on the parent you spent the most time with in the previous year.

16) And your step-parent, if there is one in that household.

17) Don’t send notes to the federal processor.  They’ll just shred ‘em.  Your concerns and questions should be directed to the financial aid office of the school you attend or are planning to attend.

18) Your parents saying that they won’t pay for College does NOT grant you independent status. To be considered independent, you have to be 24 years old, married, a military veteran or some other factors you can learn about here.

19) Here’s a link to a useful webinar about the FAFSA. (Useful, but 60 minutes in length)

20) Here’s a link to my favorite FAFSA video. (Enjoyable, only 5 minutes in length)

21) Here’s a link to my Facebook page – feel free to post any $$/FA questions you have.

22) If you have FAFSA questions, you can the federal government’s hotline at (800) 433-3243.

Read More from The College Solution:

Avoid 10 Common FAFSA Mistakes

4 Ways to Get FAFSA Help

My Upcoming College Workshop:

I wanted to let you know that I will be holding my next two college workshops at the University of California, San Diego on Jan. 28 and Feb. 4. At the workshops — you can sign up for one or both – I aim to share with you ways to help you make smart decisions about picking colleges and making them more affordable. You can learn more here and sign up for the workshops here. Lynn O’Shaughnessy

I have been writing college blog posts recently about teenagers who have arguably been applying to the wrong colleges. (Scroll to the bottom to see my three previous posts.)

All my posts have involved families who required financial aid, but today I’m sharing the plight of a father who is too wealthy to receive need-based help.

Anxious Dad’s Email

Here is the email that I received from the father, who is a financial adviser:

I have a high school senior who applied to Johns Hopkins University and was accepted.  She is also going to play field hockey there.  Being a typical “rose colored” glasses person, I figured we’d get some financial assistance.  I filled out the CSS/Financial Aid PROFILE.  The package came back and there was ZERO assistance on there.

I thought the field hockey thing would provide her some backing and consideration but I was wrong.  Additionally I’m usually very good at getting a straight answer from people and for some reason I didn’t from our liaison at JHU.  I can’t believe JHU considers us rich!  Does anyone back there know how expensive it is to live and raise a family in Southern California?

Needless to say, I’m a little discouraged and concerned since it’s such an expensive school.  I know JHU has resources.  I’m very surprised we did not get any assistance. I was wondering what you recommend.

 My Response

I am sorry that your daughter didn’t receive any money from Johns Hopkins, but this is a university that almost never gives money to rich students. If you have a high Expected Family Contribution, which was generated by the PROFILE, your daughter would have had a slim to zero chance of getting any money.

Finding the Answer in the Common Data Set

Okay, so how did I know that Johns Hopkins rarely gives scholarships to well-off students? I looked at John Hopkins’ Common Data Set, which is a valuable document that many schools complete yearly that contains a great deal of information about such things as the institution’s need-based aid, merit awards, acceptance figures, academic profile of freshmen and much more.

Section H of any school’s Common Data Set contains the information on the number of students who apply for financial aid, the number who receive aid and what the typical financial aid package is. In the same section, the Common Data Set also shares whether the school gives merit awards to wealthy students.

Only a handful of wealthy students received money from Johns Hopkins, which reserves its financial awards to  students with demonstrated financial need. Here is the pertinent section of Johns Hopkins’ Common Data Set:

In the 2010-11 school year (latest available),  just 10 freshmen received merit scholarships, which were worth an average of $26,318. To give you a frame of reference, there were 1,241 students in the university’s freshmen class and 551 freshmen received need-based grants. The average need-based grant was $30,791. Doing the math, you can see that the majority of students — 680 – paid full price. Like a lot of highly prestigious East Coast schools, Johns Hopkins is crawling with rich kids, whose parents are footing the entire bill.

Almost all schools in this country award merit scholarships to rich students, but a few highly prestigious ones don’t give awards to these teenagers or they dispense just a few token scholarships.  Johns Hopkins belongs in this category. Schools like all the Ivies and the very top liberal arts colleges don’t have to hand out merit money to wealthy teenagers because they institutions enjoy such high perches in US News & World Report’s college rankings that rich students flock to them without any carrots.

What About the Other Schools?

In responding to the dad’s email I suggested that there could be other schools on his daughter’s list that do give wealthy students merit money. Unfortunately, the two additional schools that he mentioned — MIT and Tufts University — are in the same category at Johns Hopkins.

Another way that you can research a school’s financial aid practices is to look at the institution’s profile on the College Board’s website. Click on the school’s  Cost and Financial Aid link. Here is the link to MIT. You’ll find the pertinent statistic for the dad on the second-to-last line that says average non-need-based aid. In MIT’s case it says not reported. Whenever you see not reported that simply means no merit awards for rich kids.

When I checked Tufts University’s financial aid stats on the College Board, I saw that the average non-need based aid was $500. That’s essentially nothing. Unfortunately, I couldn’t find Tufts’ Common Data Set, which is irritating, but some schools don’t release it.

Bottom Line:

It’s always important to research the financial aid practices of schools before applying. Don’t make any assumptions.

Here are more posts on applying to the wrong schools when money is an issue:

Applying to the Wrong Universities

Another Dreadful College List

Catholic Universities and Yet Another Botched College List

ynn O’Shaughnessy is the author of The College Solution, an Amazon bestseller,  and a financial aid workbook, Shrinking the Cost of College: Great Ways to Cut the Price of a Bachelor’s Degree.