Last Updated Sep 14, 2011 3:46 PM EDT
Many parents worry about this. I've heard from dads, in particular, who have worked themselves up into a tizzy about the unfairness of a system that penalizes parents who have saved.
What I tell parents is this: Relax. Saving for college almost never hurts a family's chances for financial aid. In fact, less than 4% of families have their financial aid packages impacted by college savings accounts. Here are two big reasons why:
Colleges don't care about any savings that you've squirreled away in retirement accounts. A family can stash millions in retirement accounts and it won't impact their chances for financial aid. Schools realize that parents need to save for retirement.
You can also shelter a large chunk of your non-retirement money from federal financial aid calculations. Just how much you can shelter will depend on the age of the student's oldest parent. The older the mom or dad, the greater the amount you can shield.
If the oldest parent is 56 years old, for example, the allowance would be $57,300. In this case, the couple would be able to possess $57,300 in non-retirement accounts and it wouldn't reduce a financial aid package. Let's see, however, what the impact would be if these parents had saved $100,000.
First you'd subtract their allowance from $100,000.
100,000 - 57,300 =42,700
Next you would multiple the amount by 5.64%, which is the percentage that parent assets are assessed for financial aid purposes.
42,700 X 5.64% = $2,408
The figure $2,408 would be the amount that would be tacked on to the family's Expected Family Contribution, which represents, at a minimum, what a family would be expected to pay for college.
As this example illustrates, saving for college for most families will have little to no impact on financial aid awards.
You can find out the amount of money you can shield from federal financial aid calculations by using the chart below:
Bottom Line:Saving for college rarely hurts a family's financial aid eligibility. It's always good to save for college.
Lynn O'Shaughnessy is author of The College Solution, an Amazon bestseller, and Shrinking the Cost of College workbook. She also writes her own college blog at The College Solution.
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