Empower yourself! Get the facts about 529 savings plans and financial aid eligibility.
Worried that saving for your child’s future college expenses will prevent them from getting financial aid? Get the facts!
What happens when you apply for financial aid?
- When your child approaches college age, they will need to complete a Free Application for Federal Student Aid, or “FAFSA,” form in order to be eligible for federal financial aid.
- On this form, you are generally required to include parents’ and student’s assets and income.
- A federal formula then determines a family’s Expected Financial Contribution (EFC), which is the basis for determining need based financial aid.
What impact do 529 savings have on financial aid?
- Any amount you can save is generally considered to be a “parental asset” when completing the FAFSA form. This means that the amount that you save is not treated any better or any worse than any other non-retirement assets that you have.
- The current federal financial aid formula counts – at most – only 5.6% of parental assets towards the following year’s college expenses. This is in contrast to student’s assets, which currently count about 20% towards the following year’s college expenses.
This means that if parents have saved $5,000 for college, the aid amount your student may be eligible for would be reduced by only $280. This amount may be even lower based on certain exclusions. For more information visit fafsa.gov
What’s important to remember is that more than 60% of federal financial aid is currently in the form of loans. So even if your child qualifies for financial aid, he or she is likely to receive more federal financial aid in the form of loans than in the form of grants. That’s why it’s usually better to save what you can afford before your child heads off to college.
Saving vs. Borrowing can cut college costs in half
The chart below illustrates the potential impact that saving can have on essentially cutting the cost of college in half. There are many ways that a family can pay for the cost of college. But some of those options can be more costly than others. Two of the ways that a family could choose to pay is by either saving in a 529 plan or borrowing with loans. The example below illustrates how one family could choose to pay for $25,000 in college costs.*
*All figures and information above are for illustrative purposes. This example does not consider any investment or loan origination fees. Amounts are adjusted to today’s dollars and assume an inflation/discount rate of 3% annualized.
Ready to learn more about Financial Aid? Explore the links below: