Will Saving for College Penalize My Chances for Financial Aid?

Will my chances for college financial aid be hurt if I have saved for my child’s college education?

I an always running into parents (usually dads) who worry that their college savings accounts will penalize their chances for financial aid. These parents also tend to be angry at the prospect that colleges will reward families who saved nothing.

My response to these fears:  RELAX!!

Saving for a college education will rarely jeopardize a family’s chances for financial aid.

To explain why you shouldn’t worry let’s take a look at how the federal financial aid formula treats the popular 529 college savings plans. If you own a 529 college account,  the cash is assessed for financial aid purposes at a maximum rate of 5.64%. Here’s what that means: For every $10,000 a family has tucked inside a 529 plan, need-based aid would be reduced by $564. That would still leave you with $9,436 more than if you had saved nothing.

But wait a minute!  Most parents with 529 college accounts will experience a ZERO reduction in federal financial aid eligibility. Why? Because the federal financial aid formula gives families an asset protection allowance that generally ranges from $40,000 to $50,000. The amount depends upon the age of the parents– the older you are the higher the allowance. So the formula will allow you to protect a heck of a lot of money.

Here’s something else that should cheer you up:  You also won’t be penalized for any money that you’ve squirreled away in retirement accounts. And the federal financial aid formula, which most schools rely on, doesn’t care if you own a house, which makes home equity a non-issue.

The biggest factor that determines whether you qualify for college financial aid is the family’s income. Rather than worry about whether you should be shuffling money around to avoid detection (a pointless exercise), you should be exploring how to find schools that will reward your child whether you’ve saved for college or not–and whether you qualify for financial aid or not.

Lynn O’Shaughnessy is the author of The College Solution.

Further Reading:

Finding College Cash in Obscure Places

Qualifying for Financial Aid as an Independent Student

A New and Improved FAFSA

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  1. My kid is going to college in Fall 2010. Meanwhile I am saving $150k as a 20% down payment to buy a house in California where I live. The house price in my area is still too pricy I would like to wait a bit longer.

    Supposed I have not bought a house by the time I file FAFSA next February (2/15/2010), I need to report this $150k cash. It will reduce the aid by 150,000*5.6%=$8400 which is a lot of money

    What are my options other than buying a house before February?