Will College Savings Affect Financial Aid?

The Impact of College Savings on Financial Aid: Navigating the Path to Higher Education

As parents strive to secure their children’s future, one common concern arises: how will saving for college affect their eligibility for financial aid? Planning for higher education is a significant financial commitment for families.

Understanding Financial Aid

A lot of people don’t seem to know that financial aid is available to everyone, with 25 percent of families thinking that’s the case.
It isn’t just for people in low-income families. Currently, over 85 percent of students receive some form of financial aid. Financial aid plays a vital role in making higher education accessible and affordable for students. It encompasses scholarships, grants, work-study programs, and loans. Loans can be offered by federal, state, institutional, and private sources.
The primary goal is to bridge the gap between the cost of attending college and a family’s ability to pay for it.

Expected Family Contribution (EFC)

When determining financial aid eligibility, colleges and universities consider a family’s financial strength through the concept of Expected Family Contribution (EFC). EFC is calculated based on several factors, including income, assets, family size, and the number of family members attending college simultaneously.

Impact of College Savings on Financial Aid

Savings and assets, including college savings accounts, have an impact on the EFC. However, the degree of impact varies depending on the type of college savings account.

Here are some common types of college savings accounts and their effects on financial aid:

• • 529 College Savings Plans:
    529 plans are a popular choice for college savings due to their tax advantages. These plans are considered parental assets, and the impact on financial aid is relatively modest. Only a maximum of 5.64% of the account’s value is factored into the EFC calculation each year.
  • Coverdell Education Savings Accounts (ESAs):
    Coverdell ESAs are another tax-advantaged option for college savings. Similar to 529 plans, these accounts are considered parental assets. The impact on financial aid is also limited, with a maximum of 5.64% of the account’s value assessed each year.
  • Custodial Accounts (UTMA/UGMA):
    Custodial accounts, such as Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) accounts, are considered student assets. These accounts have a more significant impact on financial aid, as 20% of the account’s value is assessed annually.
  • Strategies to Minimize the Impact: “While college savings can affect financial aid, families can employ various strategies to minimize the impact and optimize their financial aid eligibility.” said Martin Walcoe, President and CEO of David Lerner Associates of David Lerner Associates, “By planning strategically, families can navigate the complexities of financial aid and make informed decisions about their college savings strategy.”

Here are a few top tips to minimize any impact on financial aid.

• Maximize Retirement Contributions: Increasing contributions to retirement accounts, such as 401(k)s or IRAs, reduces the amount of available assets considered for the EFC calculation, thereby potentially boosting financial aid eligibility.
• Consider Shifting Assets: Parents may consider shifting assets from accounts with a higher impact on financial aid, such as custodial accounts, to accounts with a lower impact, such as 529 plans or retirement accounts. Consulting a financial advisor is advisable to navigate this process effectively.
• Plan Strategically: Families should strategically plan the timing of distributions from college savings accounts. For example, it may be beneficial to delay using 529 plan funds until the student’s junior or senior year, as assets are typically assessed more heavily in earlier years.

Saving for college is a crucial undertaking for families, and understanding the impact of college savings on financial aid is essential. While savings do affect financial aid eligibility, there are strategies available to minimize this impact.

By considering tax-advantaged college savings accounts, and optimizing retirement contributions you could be in a better position. Ultimately, seeking the guidance of a financial counselor specializing in college planning is a good idea. Find someone who can provide valuable insights and personalized advice tailored to individual circumstances. With careful planning and a clear understanding of the relationship between college savings and financial aid, families can work towards achieving their educational goals while minimizing the financial burden.

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Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.