When I give financial aid talks for students and parents, I’m often asked why a family should bother saving for college at all. Once a family sees that the financial aid formulas are based on the ability to pay, families quickly realize that money they’ve saved will actually count against them in the aid formulas, while families who’ve lived beyond their means may in fact qualify for more financial aid. That doesn’t seem like a fair system.
Still, saving for college is your best strategy for three reasons.
1. Money on hand is always a good thing.
The more money you have on hand, the more control you have over college costs. And the less you’ll need to rely on financial aid to help you pay.
2. Not all financial aid is free money.
Yes, families who haven’t saved may qualify for more aid. But a great deal of financial aid comes in the form of loans and work study, not free money. Just because your neighbor tells you his kid got $20,000 a year in financial aid doesn’t necessarily mean that the family got a $20,000 discount off the sticker price.
3. Savings actually have very little impact on your financial aid eligibility.
Financial aid formulas look at two important numbers—income and assets. Income—the money you made during the year before your student plans to attend college—is assessed at up to 47%. But your assets like savings that were built up before that year of income can only be assessed at a maximum of 5.64%.
So while you could be expected to contribute nearly half of what you made last year (income) to help pay for the upcoming year of college, you’ll get to keep about 95% of your savings (assets). Yes, about 400 colleges (mostly private schools) will use their own formulas that can produce a different amount you’re expected to contribute, but refer back to reason #1. Money on hand to pay for college is always a good thing.
If you’d like some advice about how to best save for college, the college savings section of finaid.org is a great place to start.