The way your college savings accounts are structured can affect your student's eligibility for need-based aid.
When saving for college, many parents worry about how their savings will affect their child's eligibility for financial aid. The reality is that the type of savings account you choose and how much you save can influence the need-based financial aid your child receives.
However, the good news is that savings for college are typically treated favorably in the financial aid formula. Let's explore how different college savings vehicles impact financial aid eligibility and offer strategies to optimize your savings while minimizing the effect on need-based financial aid.
Understanding Need-Based Financial Aid
In this article, we're specifically discussing college saving's impact on need-based financial aid. This type of financial aid is awarded based on demonstrated financial need. It can include grants that don't need to be repaid and subsidized student loans (in which the interest on the loan balance doesn't begin to grow while in school and certain other circumstances). Different types of financial aid can be awarded regardless of a student's financial need.
Before being concerned about saving's impact on need-based aid, consider whether or not your family would even qualify for need-based aid. Determining eligibility can be complex since aid eligibility is based not only on income (and assets in some cases) but also on the number of children in school simultaneously. Schools that award significant institutional aid may also calculate financial need differently compared to the federal formula.
But in general, it's not uncommon for middle-class families (especially those in higher-cost-of-living areas) to find that they aren't eligible for any federal need-based aid. However, schools that offer significant institutional aid may have higher income limits.
To get a rough estimate of your need-based aid eligibility, consider using the Net Price Calculator, which virtually all schools offer on their financial aid websites. These calculators ask for specific financial details (no registration is required) and provide a rough estimate of the aid you can expect. This website's College Explorer tool also offers an estimate of prices paid based on family income based on federal data.
The FAFSA and Financial Aid Calculations
The Free Application for Federal Student Aid (FAFSA) is the primary tool colleges and the federal government use to determine a student's eligibility for need-based financial aid. It calculates a Student Aid Index (SAI) based on a family's income, assets, and other factors. This figure is the amount your family is expected to contribute toward paying for college.
How different savings vehicles are reported on the FAFSA can have varying impacts on the aid your child may receive. Here's an overview:
529 Plans
One of the most common college savings vehicles, 529 Plans are typically treated as a parental asset on the FAFSA if the parent owns the account. Parental assets are assessed at a maximum rate of 5.64%, meaning only a small portion of the account's value is considered when calculating the SAI. This relatively low impact makes 529 Plans an attractive option for college savings.
Coverdell Education Savings Accounts (ESAs)
Like 529 Plans, Coverdell ESAs are treated as a parental asset if the parent is the account owner. These accounts are also assessed at the 5.64% rate, which makes their impact on financial aid similar to that of a 529 Plan. The key difference is that Coverdell ESAs have lower contribution limits and can be used for K-12 expenses in addition to college expenses.
Student-Owned Assets
If the student directly owns savings accounts, investments, or other assets, these will be counted as student assets on the FAFSA. These assets are assessed at the 20% rate, which can substantially increase the SAI and decrease eligibility for need-based aid. In other words, every $1,000 in student assets reduces aid eligibility by $200 in that school year. Then, 20% of the remaining student assets would be the expected contribution in the following year and so on for the student's time in school.
CSS Profile and Institutional Aid
Some colleges, particularly private institutions and schools with significant institutional aid, use the CSS Profile in addition to the FAFSA to determine financial aid eligibility. The CSS Profile takes a more comprehensive view of a family's financial situation, which may include home equity, retirement savings, and other assets that may not be considered on the FAFSA. This difference means that the impact of college savings on institutional financial aid could vary more widely depending on the school.
If your child may attend an institution that requires the CSS Profile form, contact the institution's financial office to explore its specific policies. Note that these policies, however, are subject to change.
Strategies to Optimize Aid Eligibility
Even though college savings can reduce the need-based aid your child qualifies for, careful planning can minimize the impact. Here are some strategies to optimize aid eligibility while still building a robust college savings fund:
The Takeaway
Remember, the goal is not to "game the system" but to make informed decisions that balance college savings with potential financial aid eligibility. Every family's situation is unique, and what works best for one may not be ideal for another. Consider consulting with a financial advisor or college funding specialist to develop a strategy that best fits your family's needs and goals.
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