How Does Your College Savings Account Affect Your Child’s Eligibility for Financial Aid?

It’s almost back to school time!  To me, that means back to homework time for parents.  And why do we do all of this nagging and whip cracking to our kids about grades?  So they can go to college and hopefully get some scholarship money to pay for it.  The ultimate goal being, of course, that your children get good jobs and move out of your house as soon as possible.


A question I get a lot about college savings is whether having a 529 college savings plan will ruin the kid’s chance at getting financial aid.  The answer is no, usually what ruins the chance of getting need-based financial aid is the parents’ income.


FAFSA (Free Application for Federal Student Aid) calculates your expected family contribution (EFC). The EFC is the amount of money that the parents and student together should pay toward college expenses, based on the cost of attending a particular school. The higher the EFC, the less financial aid you can expect to receive.*


When calculating for the EFC, different assets and income have different emphases.  The biggest driver of the formula is parents’ income.  Some of student income can also be expected to cover college costs.


Fifty percent of assets in the student’s own name (this includes the child’s checking/savings accounts and any UTMA or UGMA investments) are expected to be used toward college costs each year.  Yikes!


However, only 5.6% of parents’ assets are used in the EFC.  529 accounts count as a parental asset because the beneficiary of those accounts can be changed at the whim of the parents.  In other words, 529s are owned by parents, not kids.


Also, relax, Mom and Dad.  Your home equity and retirement accounts are NOT counted toward the EFC.


So, if you are using the excuse not to save for college that it will hurt your chances for financial aid, it’s just that – an excuse.  Instead, go to and get yourself signed up for a monthly automatic contribution to a 529 account.  Even if you can only afford $50/month you won’t be sorry to have that money when Junior heads to college.



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