HomeRoad to CollegePaying for College

How Savings Affect Financial Aid

Saving for college pays, even when it comes to receiving financial aid. Here's why.

Saving any amount of money can make a big difference in what you can afford to pay for your child's education. The earlier you start the better, but don't pass altogether because you think it's too little or too late.

Save More Now, Borrow Less Later

Remember, college is a long-term investment. Like other investments, such as buying a home, most families pay for college through a combination of savings, current income and borrowing. This means that the more you save, the less you and your child will need to borrow, and the less you'll need to take from your current income.

Will Saving Hurt My Financial Aid Chances?

Despite what you may have heard to the contrary, saving pays, even when it comes to receiving financial aid. The amount you'll be asked to pay for your child's college is based on your family's income and assets. Savings are considered an asset. However, current financial aid formulas only "tax" about 5% of your assets each year. That is, the formulas assume that 5% of your savings are available each year to help pay for college.

For example, if a family has saved $20,000, they'll be asked to contribute about $1,000 of this savings per year to college expenses. Say their expected family contribution is $10,000. That means that while only $1,000 of their assets is being "taxed," the family can, at their option, use a greater part of their savings to meet educational expenses and reduce their need to borrow.

A family with the same income and significantly less in assets might only be expected to contribute a total of $9,000, but they'd have to rely on loans to make up the difference. The family with the greater savings is in a much better financial situation and may find they have more options in making educational choices.

Comments from readers

"what does saving include? Is it the money saved under child's name or total of monies in the accounts under parents' name? Also what does the term 'asset' refer to?"
"I think the use of the word 'tax' while in quotes is still making this article more confusing than need be."
"This was an interesting article, thank you. We still have at least 6 years before college expenses, but I know it will go by quickly. This article was REX'd (recommended) on (Digg for non-techies)."
"Wow, this article cleared up a HUGE misconception I've had all along. Thanks!"
"Where does the Oregon Savings plan fit in here?? Is it considered 'savings'? Or is it under another term altogether??"