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How Your Wealth Affects Your Student’s Financial Aid

May 2, 2014 by Redwood Wealth Management

It’s that time again.  The school year is winding down and graduation is on the horizon.  For many parents, this time of year reminds them that college isn’t far off for their own children, which inevitably leads to questions such as:

  • Do we have enough money saved for college?
  • Can my child get financial aid?
  • Will our savings affect the amount of aid available?

Below are some guidelines that address these concerns – particularly those that relate to what types of assets can affect the amount of aid your child may receive.

The U.S. Department of Education distributes federal financial aid on a needs basis. It determines the amount of aid using the following equation:

Cost of attendance (COA) – expected family contribution (EFC) = financial need

To obtain financial aid, families must apply for it by completing the Free Application for Federal Student Aid (FAFSA) as early as January 1 of the child’s senior year in high school.  (The calculation is based on income for the year prior to January 1 of the child’s senior year.)  Using the information provided, the Federal Student Aid Office determines the EFC and subtracts this number from the school’s COA to calculate the student’s financial need.  The amount needed isn’t always the amount of financial aid the student receives.

So what does the Financial Aid Office consider as part of the EFC calculation? The table below shows the percentages of income and assets that they use; income is more heavily weighted than assets.

 Newsletter Chart

One important thing to take away from the chart above is that assets held in the child’s name are more harmful to the EFC calculation than assets held in the parent’s name.  Often parents worry that 529 accounts will hurt their children’s chances of receiving financial aid. In reality, however, the Financial Aid Office considers no more than 5.64% of the 529 account value in the EFC calculation.

We hope this answers the questions you may have on this topic. As always, if you’d like further clarification or advice, our Redwood Wealth Management advisors are here to help

 Author

Ross Hughes, CFP®

Financial Planner

Ross-2015

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