Does saving for college mean you’ll get less financial aid?
True or false? The richer you are, the less you’ll receive in financial aid.
The statement is generally true. But if you know the rules of the game, saving for your child’s education won’t significantly reduce their financial aid award.
The reason is that income is the major deciding factor in whether you need financial aid. Savings and other assets are factored into what you can afford to pay, but only a little.
“Assets don’t impact the bottom line all that much,” said Kal Chany, the author of Paying For College Without Going Broke.
For every dollar you save, you might — at most — lose 5.6 cents in financial aid.
“You will be much happier if you have saved for college,” Chany said.
But some saving strategies are better than others. Here’s what you need to know.
Don’t save money in your child’s name
Assets in the child’s name — including a savings account, trust fund, or brokerage account — will count more heavily against the financial aid award than assets in a parent’s name.
Money saved in an account owned by the child could cost you four times as much in financial aid as money in an account owned by a parent.
Using a 529 college savings account
A 529 college savings account is useful because it can lower your tax bill. The earnings on money invested are not taxed as long as the funds are used for tuition, fees, books, or room and board.
To play it safe, make sure a parent is the owner of the account. The child can be named the beneficiary, and the money will still be considered a parental asset.
But be careful using money from a 529 account owned by a grandparent or other relative. While it won’t count at all as an asset, it could hurt your aid formula two years after you withdraw money to pay your tuition bill. At that point, it will be considered income.
Minimize your income
Parents’ income is the biggest factor in the financial aid calculation.
“$10,000 in extra income has a much bigger impact on financial aid than $10,000 in assets,” Chany said.
While you don’t want to ask your boss for a pay cut, there are some things you can do to reduce your income. For example, avoiding large capital gains or withdrawals from a retirement account. If you’re due a large bonus at work, ask if you can defer receiving it.
The federal financial aid formula is based, in part, on your income two calendar years before the start of the school year. So, it helps to maximize your income before January 1 of your child’s sophomore year of high school, or defer extra income until after January 1 of their sophomore year of college.
Loans might be part of your financial aid award
Financial aid formulas intend to calculate how much a family can afford to pay. This is called the Expected Family Contribution.
More income and assets will result in a bigger EFC. Financial aid is meant to fill in the gap between the EFC and the college’s price tag.
Some colleges say they will make sure the remaining cost is met, but others don’t make that promise. Many public schools won’t do it for out-of-state students.
Even if the institution pledges to meet a family’s full need, the aid award could include loans — which will have to be paid back by the student.