At a party over the weekend, I talked to a lot of parents, who worry that they've ruined their chances for college financial aid because they have saved. And they are hardly alone. Parents commonly believe that colleges only reward deadbeat families who are completely unprepared for college expenses.
Here's my response to those fears: RELAX! When parents don't qualify for student financial aid, it's rarely because they've saved too much.
Here are the two big reasons why being a super saver is rarely a financial-aid deal breaker.
1. Colleges ignore retirement assets. That's right, nobody cares how much you've accumulated for retirement. You could have millions socked away in Individual Retirement Accounts, 401(k) plans and other retirement accounts and it won't hurt your financial aid chances at all. That's true whether your child attends a private or state university.
2. Parents can also shelter non-retirement money. Saving money for college in a 529 plan, Coverdell or taxable accounts rarely jeopardizes a family's chances for financial aid because of an asset allowance. Families completing the FAFSA enjoy the benefit of an asset allowance that allows parents to shield lots of this cash from financial aid calculations.
How much you can shelter depends on the age of the oldest parent and whether you are using the federal aid formula or the one used by some private colleges. The higher the age, the more assets a family can shield. Here are examples from the federal asset allowance table:
Oldest Parent Age 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
Any parental money that exceeds the allowance will only be assessed for financial aid purposes at 5.64%. So after using the allowance, a 55-year-old couple with $100,000 in non-retirement assets would only have $39,800 assessed for financial aid purposes. After calculating 5.64% of $39,800, the family would be expected to contribute just an additional $2,245.
So here's the bottom line: Keep saving.