Will Saving For College Hurt Your Odds for Financial Aid?

Is your family going to qualify for financial aid?

Many families that I talk to assume that they won’t qualify for financial aid. Many believe that the money that they’ve stashed in their college savings accounts will kill their chances.

Stressed Out Dads

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 percent 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, also don’t penalize parents for their retirement savings.

2. Parents can also shelter plenty of money outside 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.

How much you can shield from the FAFSA formula depends on the age of the oldest parent. The older the parent, the more you can shelter.

Let’s say the oldest parent is 52. The family would be able to shield $55,500 in 529 savings plan money, as well as any other cash laying around in taxable accounts such as savings and brokerage accounts.

Oldest Parent Asset Allowance
45 $46,600
47 $48,900
50 $52,900
52 $55,500
55 $60,200
58 $65,300
60 $69,200
62 $73,200
65+ $80,300

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 $60,200 from the FAFSA formula, which would leave $39,800 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 $39,800 in assets would be assessed at a parental rate of 5.46 percent. When you do the math, the child’s eligibility for need-based aid would only drop by $2,173 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 a no brainer.

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.

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2 Responses to Will Saving For College Hurt Your Odds for Financial Aid?

  1. Aubrey Joy November 18, 2010 at 10:26 pm #

    Yes, FAFSA formula automatically subtracts the allowed amount associated with the age of the older parent from the amount of declared assets and take 5.6% of the difference.

  2. Mary Fox November 15, 2010 at 9:34 am #

    Does this “shielding” happen automatically or do you have to do something special? You make it sound like it is worked into the formula of the FAFSA.

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