Why Saving for College Won't Kill Your Chances for Financial Aid

Relax. College accounts aren't hand grenades that could explode at any minute.


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.

[Read about best value colleges.]

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.

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 percent of families who fill out financial aid applications are penalized for their savings.

[Read 10 Tips for Getting More Financial Aid.]

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.

[Read how the easier FAFSA inspires hope for more financial aid.]

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.

[Get more tips on paying for college.]

So what's the bottom line? Saving for college will hardly ever hurt your chances of financial aid.