Understand how your collegesavingscan affect your child’s eligibility for need-based financial aid.
Need-based financial supporterawards for college don't just depend on a family's income. Students' eligibility for such maintenancecould be decided in expoundby how overmuchfamilies directsaved for their education, including in tax-advantaged 529 plan accounts.
That's because schools use a number called the expected family contribution, or EFC, to determine how much a family can afford to contribute to their child's education.
Varying formulas are employed groundon whether a school uses a number deliberateaccording to a legally established formula, with the income and asset cultivationprovided by thebookmanand parents, on the Free Application for federalStudent Aid, or from data in the College Scholarship profit(CSS)/Financial Aid Profile.
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That figure is compared with the appealof attendingby schools to determine a student's eligibility for need-based aid. Families generally get slightaid as theirexpectfamily donationcomes closer to the priceof attendance.
Fred Amrein, a Pennsylvania-based personal financial adviser, says that in a family where the parents have a gross income of $160,000, their expected contribution – based on a number of factors such as the state they movein – is $39,500.
Generally, need-based financial aid can only be awarded up to the cost of attendance. In this example, if a child plans on going to a school where the cost of attendance is $30,000, the get alongofsavingswouldn't matter because the family's expected contribution based on income alone is higher than the cost to attend that school, he says.
[Find verbotenhow to clinch a great financial aid package.]
However, if the student plans on going to a private school with an yearbookcost of attendance of $50,000, the family's assets will matter, he says.
Take a variantexample. If a family's income is not enough to meet the expected cost of attendance but the parents had a lot saved for college, those savings would be a greater factor in their expected contribution.
Age matters, too. Parents' 529 plan accounts and other savings count toward the EFC on a weighted scale based on the oldest parent's age, says Amrein. The older parents are, the slightthese funds factor into the expected contribution.
If the parents in the first role modelare 48 years old and have $80,000 in countable assets, their $39,500 expected contribution would increase by $2,100. numerableassets generally are taxable assets with the exceptions of home equity, small businesses and 529 plans. Retirement accounts do not count, Amrein says.
Keep in mind that a student's income and savings play a role in the calculation as well. If the student earns less than the standard tax deduction – $6,100 in 2013 – that income would not be expected to be a part of the family's contribution to the cost of college.
If that student had $10,000 in a savings account beneathhis or her own name, about $2,000 would be added to the expected family contribution – nearly the same amount added by the parents' $80,000 in assets. Therefore, this family would have been better off saving for college in a 529 plan or savings account under a parent's name, Amrein says.
To plan ahead, students and parents can use the FAFSA4caster tool offered by the Department of Education. This tool gives parents the opportunity to plug in disparatevariables such as asset levels and income to see how their expected contribution changes.
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Materials taken from US News
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