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Financial Aid Myths: Does A Savings Account Affect Financial Aid?

Financial Aid Myths: Saving For College Won’t Hurt Your Chances

Among the pervasive myths when it comes to paying for college is that saving for college will hurt your chance of getting financial aid. Many parents assume that a college will see your savings and decide it’s all available for tuition. But does a savings account affect financial aid?

Not true, says Lynn O’Shaughnessy, author of The College Solution: A Guide for Everyone Looking for the Right College at the Right Price. “Saving for college almost never penalizes you. It’s a non-issue for the vast majority of people because of what the financial aid formulas care about.”

The Truth About Financial Aid Rules

For starters, the Free Application for Federal Student Aid (FAFSA)—which is what colleges use in determining financial aid—does not consider your retirement savings or the value of your home at all. In other words, your retirement savings and your home are not considered assets available to pay for college.

But a parent’s non-retirement assets—including college savings—are not all up for grabs either.

In fact, FAFSA assesses parental assets (again, not including retirement assets or your house) at just 5.64 percent. So, for a 55-year-old parent with $100,000 in college savings, the Expected Family Contribution—what a college will expect you to pay each year—will only increase by $3,000 a year, or $12,000 over four years, nowhere near the entire $100,000 that this parent has in savings.

“It’s never too late to start saving,” explains Courtney Walls, vice president of BlackRock, Program Manager for the CollegeAdvantage Advisor 529 Savings Plan. “The starting contribution in most plans is just $15 to $25. Even if you only get a few years of tax-free growth, the cost of savings outweighs the cost of borrowing.”

That is, saving even a small amount of money now will cost you or your teenager less than paying back the same amount in loans—with interest—later. These days, 529 plans offered by companies like BlackRock are a popular way to save. Think of these plans as 401Ks for college. Contributions are tax free, as are withdrawals when used for qualified education expenses, like tuition, room and board, and books.

Diana Simeon is an editorial consultant for Your Teen.

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