Many parents worry that their college savings accounts will kill their chances for financial aid. Most families, however, who have saved for college are not hurt in student financial aid considerations.
Here are the two biggest reasons why saving money often won’t jeopardize your financial aid chances:
1. Colleges don’t care how much you (or your child) has 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. Colleges and universities that use the CSS/Financial Aid PROFILE, will ask about a family’s retirement accounts, but they won’t penalize parents for these assets.
A family could have millions of dollars stuffed in retirement accounts and it wouldn’t impact their chances for need-based aid.
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 financial aid formulas will also let you shield a portion of your non-retirement money through a savings and asset protection allowance.
As you can see from the chart below that I pulled from the EFC Formula Guide, 2013-2014, 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 that is automatically shielded from the financial aid formula.
Let’s say the oldest parent is 53. The family would be able to shield $44,200 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 $53,500 from financial aid calculations.
The amount a mom or dad could shelter in a one-parent household is significantly less. A 53-year-old single parent, for instance, could shelter just $12,800.
Asset Allowance Illustration
Using an example should make it easier to see how this allowance would work. Let’s assume that a family has $75,000 in non-retirement assets, including $25,000 in a 529 savings plan, and the oldest parent is 53.
The family would get to shield $44,200 from the FAFSA formula, which would leave $30,800 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 $30,800 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 $1,737 even though the family had $75,000 in the bank. Putting this another way, the child’s Expected Family Contribution would rise by just $1,737. There is no guarantee, by the way, that a lower EFC would have generated a higher grant/scholarship for a child. The student might have just been offered a larger college loan.
Knowing this, would you rather be a family who saved nothing for college or the family who has $80,000 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.
The Shrinking Asset Allowance
A reader named Tim recently posted a comment on my college blog in which he noted that the asset protection allowance has been shrinking. Here is his note:
The EFC formula has evolved in the past few years to greatly reduce the asset protection allowance of parents. For example, the allowance for a 60-year old in 2011-2012 was $64,000 and only $45,500 for 2014-2015. That would amount to an increase of $2000 in EFC for many families. Do you know of any rationale for this? I thought the government was trying to make college more affordable, not less.
Here is my response:
You are correct that the EFC asset protection allowance has been declining. The asset protection formula is tied to the movement of Social Security benefits. When benefits are rising, the government figures parents won’t need to save as much for retirement and so the allowance is reduced.
Here is a great article from Troy Onik that explains what’s going:
Lynn O’Shaughnessy is the author of The College Solution: A Guide for Everyone Looking for the Right School at the Right Price.