Many families assume that accumulating significant savings will automatically hurt their child’s chances for financial aid. That’s not always true.
Regardless of need, many families are eligible for various types of aid. Knowing the basics will make the financial aid process less daunting and is crucial to understanding the role of 529 college savings in financial aid eligibility.
Parents and students applying for financial aid must fill out an annual form, the Free Application for Federal Student Aid (FAFSA). FAFSA uses a formula to determine the Expected Family Contribution (EFC), which is the minimum amount the student and family are expected to contribute toward the cost of college. This, in turn, helps determine how much financial aid a student may receive.
While 50% of a student’s income, 20% of a student’s assets and between 22% and 47% of parents’ income is used to determine the Expected Family Contribution, only a small amount (between 2.6% and 5.6%) of money saved by parents in a 529 plan is factored into the equation.
For many families, saving in a 529 plan won’t have a dramatic impact on financial aid, but it will provide many potential benefits.
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