Many parents worry that their college savings accounts will kill their chances for financial aid.
If that’s what you’re stressing about, here’s my advice: take a deep breath! Most families who save for college are not hurt in student financial aid considerations.
Why Your Savings Won’t Hurt Financial Aid Chances
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 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 they won’t 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 53. The family would be able to shield $50,700 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 53-year-old single parent, for instance, could shelter just $17,500.
Asset Allowance Illustration
Using an example should make it easier to see how this allowance would work. Let’s assume that a family has $80,000 in non-retirement assets, including $25,000 in a 529 savings plan, and the oldest parent is 53.
The family would get to shield $50,700 from the FAFSA formula, which would leave $29,300 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 $29,300 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 $1,652 even though the family had $80,000 in the bank.
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.
Lynn O’Shaughnessy is the author of The College Solution: A Guide for Everyone Looking for the Right School at the Right Price.