{"id":247,"date":"2022-09-05T18:34:20","date_gmt":"2022-09-05T18:34:20","guid":{"rendered":"https:\/\/collegeaidpro.com\/?p=247"},"modified":"2022-10-27T13:24:39","modified_gmt":"2022-10-27T18:24:39","slug":"does-saving-for-college-reduce-financial-aid","status":"publish","type":"post","link":"https:\/\/collegeaidpro.com\/does-saving-for-college-reduce-financial-aid\/","title":{"rendered":"Does Saving for College Reduce Financial Aid?"},"content":{"rendered":"

Parents regularly express frustration to me, for having been penalized for saving for their child\u2019s education and receiving a smaller aid package.<\/p>\n

I\u2019ve actually had some young parents share that their friends have told them not to bother saving at all because they will get less financial aid from colleges.<\/p>\n

Should You Save?<\/h2>\n

The bottom line, from my experience, is that families with savings are better off<\/a>.\u00a0 Let\u2019s look at why:<\/p>\n

When you apply for financial aid, there is a formula for determining the Expected Family Contribution (EFC). The\u00a0EFC is the\u00a0minimum annual<\/em>\u00a0amount a college thinks your family can afford to pay for college<\/strong>. You notice how I have underlined and italicized the words \u2018minimum\u2019 and \u2018annual\u2019.<\/p>\n

In 7 years of working with families I have never had a parent look at their EFC estimates and say:\u00a0Oh, that\u2019s doable<\/em>. Instead, most parents ask me:\u00a0Where am I going to come up with that kind of money?<\/em>\u00a0They become even more alarmed when they realize that the EFC value they see is not for four years, but for only one year!<\/p>\n

Digging Into Your EFC: How It\u2019s Calculated<\/h2>\n

Only your non-retirement assets are included in the calculation of your Expected Family Contribution (EFC). Non-retirement assets include checking and savings accounts, investment accounts, stock grants \u2013 basically anything that is not in a retirement account (e.g., 401k, 403b, IRAs).<\/p>\n

EFC calculations consider parents\u2019 non-retirement assets as well as the student\u2019s assets. In the EFC calculation, you are expected to contribute 5.64% of those assets each year to pay for your child\u2019s education. (There are specific allowances that may reduce this amount, but let\u2019s keep it simple).<\/p>\n

So, suppose the parents have $100,000 in non-retirement assets (including a college savings account \u2013 529). The EFC formula includes 5.64% of these funds in the EFC calculation which equals $5,640. If the family has not saved any monies outside of retirement accounts this number would be zero.<\/p>\n

Let\u2019s assume for a moment that the Jones family had not saved any monies outside of retirement accounts because they believed they would be better off financially since they would receive more financial aid. In this case, their EFC would indeed be reduced by $5,640 per year, which may increase their financial aid.<\/p>\n

However, there is a significant problem with this approach.\u00a0 For most families, the most significant contributor in the EFC calculation of your \u201cability to pay\u201d is the parents\u2019 adjusted gross income (AGI).<\/p>\n

The EFC formula requires you to contribute 5.64% of your non-retirement assets to your child\u2019s education ($5,640 for the Jones family above). However, the EFC formula assumes that you will\u00a0contribute up to 47% of your total income<\/strong>\u00a0toward funding your child\u2019s college education! (The EFC formula subtracts taxes and other allowances, so it is not as simple as 47% of your gross, but let\u2019s keep it simple for this example.)<\/p>\n

Let\u2019s Look At An Example<\/h2>\n

As an example, a family with an Adjusted Gross Income (AGI) of $120,000 will have a contribution to their EFC from their income of about $20,000 \u2013 $25,000.<\/p>\n

Let\u2019s look at the Jones family.\u00a0<\/em><\/p>\n