Does Saving for College Hurt My Financial Aid Chances?

If there is one pernicious myth that I could stomp out of existence it would be the one that goes like this: "I can't save any money for college because the financial aid office will see it and then I won't receive any financial aid." Though this is a common belief by families with college-bound students, it's not a true statement. Let me explain.

Financial aid is awarded on two bases: merit and financial need. When you hear about academic, artistic, or athletic scholarships, these are examples of merit-based aid, granted in recognition of student achievement. In most cases, family finances are not considered in awarding merit-based aid.

Most financial aid is need-based. When applying for financial aid, you'll be asked to submit financial aid applications, including the FAFSA. These applications will ask about your finances and household. Based on the information you report, including your income, assets, taxes paid, and household size, you will receive an Expected Family Contribution (EFC). This is a formula-calculated figure that is intended to represent the amount you can absorb in college costs for one year. A low EFC means more eligibility for financial aid. Most people assume that saving for college will result in a high EFC, and therefore less financial aid eligibility.

What most people don't know is that most of the weight in the EFC calculation is given to income, not assets. In fact, the EFC formula used by every college and university only takes into account, at most, 5.6% of parent total assets, which include all college savings accounts. This means, if you saved, for example, $10,000 for college, the EFC formula would only include $560 of that in your EFC. So the impact of saving for college on financial aid is minimal to say the least. And if you've saved $10,000 for college costs, that means you'll have $10,000 that you won't need to borrow and pay back later with interest.

I've spoken with many parents over the years who are very concerned about the impact that saving for college will have on their child's financial aid. But once I explain how the EFC formula works, their minds are put at ease. And in all my years working to guide parents through college planning, I've never spoken to one parent who has regretted saving.  In fact, the most common sentiment I hear is "I wish I had done more." If you haven't started saving for college, start now. You can learn more about Massachusetts' college savings plans right on our website. Open an account, and start saving today.