No. 1 FAFSA Myth: College Savers Are Penalized

I want to follow up on yesterday’s post that explained why saving for college almost never hurts a family’s chances for student aid.

Yesterday I shared a chart that illustrates how colleges allow families to shelter a large chunk of their savings from FAFSA financial aid calculations. You can see the FAFSA chart by clicking on this link:

2 Biggest Reasons Why Saving for College Won’t Hurt Financial Aid Chances

Now I want to delve a little farther into this FAFSA myth. If you’ve clicked on my link above, you now know that FAFSA allows parents to shield a lot of their savings from the student financial aid formula. Fifty-year-old parents, for instance, can shelter up to $52,900 in assets.

But what if you’ve been a super saver and you tucked considerably more away?

Chances are you can still relax. In many cases, super-sized savings are still going to make a minimal impact on the college financial aid formula. Don’t believe me?  Here’s an example using the hypothetical 50-year-old parents.

Let’s suppose these parents have $100,000 saved up that’s divided among a 529 plan, a taxable brokerage account and a couple of certificates of deposit. (Remember that retirement savings aren’t counted at all in financial aid formulas.)

When you subtract their allowance of $52,900, the family will have $47,100 subject to financial aid calculations.

Colleges, however, don’t say:  Oh goodie, you can spend that entire $47,100 on a child’s education! No, the financial aid formula only assesses the parents’ assets at a maximum rate of 5.64%.

So the aid processors would multiple $47,100 by 5.64% and reach a figure of $2,656. And $2,656 would be the amount that would be tacked on to the family’s expected family contribution or EFC, which is the amount of money that a family is expected to pay for college.

Here’s the bottom line: Saving for a child’s college costs hardly ever hurts financial aid considerations. Even though the couple saved $100,000, it only boosted their EFC by $2,656. And that’s a small price to pay for all that cash.

Lynn O’Shaughnessy is the author of The College Solution, an Amazon bestseller, and she also writes a college blog for CBSMoneyWatch.

Further Reading:

2 Biggest Reasons Why Saving for College Won’t Hurt Financial Aid Chances

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