The Financial Aid Factor

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By Robert Brokamp (TMF Bro)
April 30, 2002

The type of college savings account you choose will likely play a role in how much financial aid you or your student will be offered. We'll take a look at how each type of account affects aid eligibility, but let's first get a few things straight about financial aid:

  • When it comes to calculating a student's expected family contribution (EFC), income is a bigger factor than assets. It is important to consider how your college savings account might affect aid eligibility, but it's not as important as what shows up on the student's and parents' tax returns.
  • The vast majority of financial aid comes in the form of student loans. You may be offered a smaller financial aid package if you've saved over the years, but that usually just means you'll be offered smaller loans.
  • In the EFC calculation, who owns the college savings account is important. The federal formula factors in 35% of the student's assets, but just 5.6% of the parents' assets. Therefore, if you're looking to increase your chances for a generous aid package, keep assets in the parents' name.

Now, let's see how each type of college savings account affects aid eligibility.

Coverdell ESAs
The assets in a Coverdell ESA belong to the student. As stated earlier, the EFC calculation factors in a bigger chunk of a student's assets. Therefore, a Coverdell ESA is not as financial aid-friendly as a 529 plan under the control of someone else.

529 prepaid tuition plans
Accumulated credits in a prepaid tuition plan are considered the student's resource, and thus can reduce a student's eligibility for aid dollar-for-dollar. In other words, a prepaid tuition plan can significantly reduce the aid package offered to the student. Though that sounds bad, it's better to plan on not getting aid, rather than not planning at all and hoping for aid. Also, participation in a prepaid plan will not affect all aid, such as Pell grants and Stafford loans.

529 savings plans
The assets in a 529 savings plan are considered property of the account owner, not the student (unless the account owner is the student). If the account owner is a parent, then 5.6% of the assets in a 529 savings plan will be factored into the EFC. If the account owner is someone other than a parent or the student -- such as a grandparent or friend -- then the assets won't be factored into the EFC calculation at all.

The winner: 529 savings plans
If you're looking for the account that will have the smallest impact on your financial-aid eligibility, the 529 savings plan is the clear choice. However, financial-aid practices change all the time. For example, there is a move afoot to have prepaid plans treated just like 529 savings plans. Therefore, check regularly with the Department of Education and prospective schools to monitor policy changes.