Many parents with college-bound kids believe that because of the amount they’ve saved in college accounts, their child won’t get financial aid, while those who didn’t save a dime will be showered with money. They’re wrong.
Parent investments rarely hurt chances for financial aid, and advisors can talk sense into clients with college-aged children. Clients will be in a far better position and enjoy more college options if they’ve saved for their child’s college education. Here’s why:
Some parent assets are protected
The Free Application for Federal Student Aid (FAFSA), which millions of families complete each year, doesn’t even ask about two significant sources of household wealth: home equity and qualified retirement accounts. Your clients should know that the vast majority of schools, including nearly all public colleges and universities, only use this federal financial aid form to determine aid eligibility.
About 260 mostly private institutions, including those with the most coveted brand names, use an additional aid form called the CSS/Financial Aid PROFILE. These schools rely on the PROFILE to determine who will receive their own institutional financial aid; they use the FAFSA to determine who is eligible for state and federal need-based aid.
Unlike the FAFSA, PROFILE schools do ask about a family’s retirement accounts, but these schools very rarely penalize parents for their retirement assets. PROFILE schools also inquire about home equity, but many impose a cap on how much they will assess for aid purposes. Some don’t consider home equity at all. The caps are tied to a family’s income.
College savings are assessed at a low rate
What both the FAFSA and PROFILE do care about is non-retirement assets, including 529 college savings plans and taxable accounts. Yet their aid formulas only assess a small portion of parents’ non-retirement assets.
Private schools using the PROFILE will assess parent investments at no more than 5 percent. Here’s an example:
Let’s say parents amass $100,000 in a 529 college account or other non-retirement accounts. The formula would only reduce the family’s financial aid eligibility by $5,000 ($100,000 x 5 percent).
Parents would be vastly better off having $100,000 set aside for college than to have saved nothing and possibly be eligible for an additional $5,000 in aid. In reality, that extra aid would likely be in the form of loans.
Parents can shelter some college savings
Schools that exclusively use the FAFSA will assess college savings at a slightly higher rate (5.64 percent). This, however, can be a better deal because parents can shield some of their money from the aid formula.
How much you can shelter from the FAFSA formula depends on the age of the oldest parent. The closer the parent is to retirement age, the greater the amount the family can shelter.
Let’s say the oldest parent is married and 52 years old. The family would be able to shield $33,500 in non-retirement money for students applying for aid for the 2015-2016 school year.
Assuming this family had saved $100,000, $66,500 would be assessed for aid purposes at 5.64 percent after the formula automatically deducted the sheltered portion. In this example, the savings windfall would only reduce aid eligibility by $3,750.
The federal formula that dictates how much money married and single parents can shelter changes each year. You can find the chart with the amounts by checking page 19 of the federal Expected Family Contribution Formula 2015-2016.
While many parents worry about the impact of saving for college, it often doesn’t make much of an impact on financial aid awards. But if your clients have amassed large amounts of non-retirement assets, they should be looking for schools that provide merit scholarships to high-income students. The good news is that most schools fall into that category.
It’s absolutely essential to save for college, and the individuals who are definitely losing out are the parents who have the means to save, but don’t bother.