Why Saving for College Won’t Hurt Your Financial Aid Chances

Is your family going to qualify for financial aid?
Many families I talk to assume that they won’t qualify for financial aid. Why are so many parents pessimistic about their chances for financial assistance? I think a lot of them assume that the money they’ve squirreled away in their college savings accounts will kill their chances.
I find it ironic that when parents have small children, they feel good about setting aside money for college. When the college years loom, however, some parents begin viewing their college accounts as hand grenades that could explode at any minute.
It’s been my experience that it’s typically dads who get stressed out about how colleges will treat these accounts for financial aid purposes. Some fathers whom I’ve talked with have become embittered about this issue. They are especially incensed at the possibility that families that didn’t set aside money for college will hog all the aid.

The Fear is Overblown

If that’s what you’re worried about, here’s my advice: Relax.
Families who save for college are rarely hurt in student financial aid considerations. In fact, it’s been estimated that fewer than 4% of families who fill out financial aid applications are penalized for their savings.
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 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? Obviously, it’s a no brainer.

Bottom Line:

Saving for college will hardly ever hurt your chances of financial aid. Squirreling away money for college is a good thing.
As usual, if you’d like to comment or ask a question about this post, please use the comment box below!
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.

Read More on The College Solution:

The Hazards of Dreaming About Colleges
4 Ways to Get FAFSA Help
Private Colleges and the FAFSA

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  1. Yes, your savings are protected somewhat, but you’re definitely punished for working and remaining married. I know more than a few divorced parents who make the poorer parent the custodial parent just so their child can get financial aid. Even if the aid consists of loans, they are then eligible for the subsidized loans that do not accrue interest until the student graduates. We’re not even eligible for those. Some of these people literally gambled their money away, while we scrimped and saved.

    1. HI Z,
      You are right that divorced parents can get a break in the financial aid process. And some do abuse the system in the way you suggested. As someone who has been married for 26 years, I’m not thrilled with this, but it’s the reality.
      Lynn O’Shaughnessy

  2. Thanks for this info, Lynn. I’d like to add one some additional information for your readers…While the federal methodology for computing EFC with the FAFSA will, in most cases, result in a lower EFC than the Institutional Methodology used by CSS Profile schools (because of additional assets considered like home equity), that is not always the case. One reason is because of the way asset protection is calculated under Institutional Methodology (IM). As you’ve pointed out, Lynn, the FAFSA uses a simple asset allowance based on age. The institutional methodology uses a more complicated formula that includes an “Emergency Reserve Allowance” based on number in family (which is about $30K for a family of 5), and an “Education Savings Allowance” (ESA) based on the number of kids in college AND pre-college aged kids. The ESA calculation starts with an assumption that the family has saved about 1.5% of current income for the cumulative ages of all children, then calculates an allowance based on the sum of the ages of college and pre-college aged children. So, for a family with an income of $100,000, one child in college and two pre-college aged kids ages 8 and 12, the ESA would be about $46K. Add that to the Emergency Reserve allowance of about $30K and you’ll see that under (IM), the family in this situation would have about $76K of assets sheltered.
    So, my point is – don’t always assume that your EFC will be lower with the FAFSA than with the CSS. Plug your numbers into calculators for both and see how it turns out.
    Unfortunately, while the Federal EFC Formulas or widely available, determining the specific components of EFC under the Institutional Methodology is not so easy for most people to do. You can use an IM EFC calculator, but it won’t break it down and show you the specific components of asset/income contribution to EFC

    1. HI Rich,
      Excellent information about the PROFILE methodology. It’s always been frustrating to me that there isn’t a readily available place, such as the College Board, for the breakdown of what’s inside the PROFILE methodology. I appreciate you sharing this!
      Lynn O’Shaughnessy

  3. Lynn, I love reading your posts because they are always so informative and you drill down into the numbers!
    As for parents who have saved and feel that those who haven’t are getting a deal when it comes to financial aid, I would say not necessarily. Most schools don’t meet full need; even fewer meet full need WITHOUT loans. Schools in the latter category are definitely a great deal for students with lots of need, but first you have to get in.
    The reality is that many families are looking at either loans in the FA package, loans to fill the gap between their need and what’s awarded, and / or loans to meet all or part of their EFC. Families who haven’t saved – and don’t have a student who has what it takes to get into a Meet Full Need / No Loan school – are absolutely in worse shape than a family that has some savings earmarked for college. Families without savings usually have to take out more loans and / or the student has fewer viable options.