Many parents and teens worry about saving enough money to pay for college. Interestingly, the more money a family saves, the less financial aid they will receive. This is because the formulas used to determine aid eligibility account for the money that the family, and especially the student, has saved.
Financial Aid Formulas
Savings accounts affect financial aid because they are part of the information families enter on the Free Application for Federal Student Aid. Both the student and the parents, if the student is dependent, enter all of their savings accounts and assets into the form. The government uses the amount in these accounts as part of the calculation of the Expected Family Contribution, which is an estimation of how much the family should be able to afford for college each year. Many colleges meet all of the student's financial need, which is the difference between the cost of attendance and the EFC. Therefore, the lower the EFC, the more aid a student is eligible to receive.
Student Savings
A student is expected to contribute approximately 20 percent of his savings and assets for college costs each year. Therefore, if a student has saved $4,000 before starting college, the EFC formula will expect the student to contribute $800 of that toward the first year of college.
Parent Savings
The parents are only expected to contribute 5.64 percent of their savings and assets toward the child's education each year. Therefore, if they report $50,000 in savings, $2,820 of this is expected to go toward college costs that year. However, if they have multiple children in school, this amount is divided between the children in the calculations.
Strategies
Because students must contribute more of their savings than parents, the parents should keep assets in their name rather than giving them to the student. If a student does have some savings, he should maximize financial aid in future academic years by using this saved money to pay for tuition before dipping into the parents' savings account. Having less savings in future years will lower the EFC and increase financial aid. Lastly, if relatives want to give money to support the student's education, it affects financial aid less if they give it to the parents or wait until the student has graduated and give it to pay off loans.
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