College Savings

Setting the Record Straight on Saving for College

We have been reviewing results this month of a recent survey of parents and their attitudes toward saving for college.

We have been reviewing results this month of a recent survey of parents and their attitudes toward saving for college. The results included lots of encouraging news, such as the fact that 71% of Massachusetts parents have started saving for college.

However, a couple statistics stand out as not so good news. They show that many parents misunderstand financial aid, and continue to have a misconception that saving for college hurts the chances of receiving financial aid.

The survey, conducted by MEFA and Fidelity Investments, showed 65% of parents believe that saving too much for college will significantly impact their child's eligibility for financial aid. And 52% of parents believe their child will not have to pay back financial aid.

Both are common myths that need to be debunked. In short, they are not accurate.

Financial aid offers are calculated based on the "Expected Family Contribution" (EFC). In other words, how much the federal government expects a family to contribute toward paying for college.

The biggest factor in calculating the EFC is annual income, not parental savings. In fact, just over 5% of parental assets are usually included in the financial aid formula.

What does that mean? Even if a parent saves an impressive $100,000 for college, the federal government will only expect that parent to contribute about $5,000 (or less!) of the savings toward paying for one year of college.

Check out the table below for an example. Family A has income of $100,000 and is expected to pay $16,134 for college costs according to the EFC formula. Family B has the same income and $100,000 in savings, and is only expected to pay $20,065 for college, just $3,931 more than Family A, though Family B have substantially more resources.

EFC Table

The second myth – that financial aid does not have to be paid back – is terribly misleading. The biggest type of financial aid is federal student loans. That's right, when you hear the term "financial aid," it includes federal loans that must be repaid with interest.

According to statistics from the College Board, 34% of all financial aid offered in the 2013-14 academic year was federal loans. That was followed by institutional grants (21%) and Pell grants (18%).

Clearly, parents are better off saving for college than not, and by saving, they will have more options on what college their child can attend and how to pay for tuition, room, and board. Your goal should be to reduce the type of financial aid that you must repay – loans – and the absolute best way for most families to do that is by saving for college.