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What effect does parents' savings account have on EFC?

smooth13smooth13 Posts: 2Registered User New Member
I have a son who is a Junior in high school and I'm trying to get some finances in order within the next week, since my understanding is that FAFSA uses finances beginning in January of the student's junior year.

I have a 529 account set up for him and we have already been putting funds in there for him. He doesn't have much in any regular savings account - probably less than $250, so I think we're okay there. What I'd like to know is how much of my own savings account is taken into consideration and if there is something I should do to "hide" some money. We've heard that it is a good idea to take a portion of the parents' savings account and do something with it. Is this true?
I just received a year-end bonus of $17,000 so I'm looking for advice on what to do with it for FAFSA (EFC?) purposes. I will put a few thousand into the 529 (probably $3,000). We're also considering paying off a car ($3500) and making a home improvement or two for another $3-$5,000. Are we doing the right thing? SHould parents really do whatever is possible to lower their own savings (maintaining a comfortable level for emergencies, living expenses, etc...) ?

Any advice would be greatly appreciated for our first college planning experience!
Post edited by smooth13 on

Replies to: What effect does parents' savings account have on EFC?

  • 2college2college2college2college Posts: 1,523- Senior Member
    The will expect you to use 5.6% of your savings, after your protection amount. IMO, it's not worth making yourself cash poor to avoid paying this.
  • swimcatsmomswimcatsmom Posts: 14,868Registered User Senior Member
    You have a certain amount of asset protection based on the number of parents and the age of the older parent. After that the assets have a 5.6% impact on the EFC. (The savings in the 529 account are also part of the assets you must report).

    Your 2011 income will be the income used for the 2012-2013 FAFSA. The assets will be the assets you have on the date you file FAFSA, which will be some day in early 2012.

    Income has a much larger impact on your FAFSA EFC than assets do, unless there are substantial assets.
  • charlieschmcharlieschm Posts: 4,282Registered User Senior Member
    As stated above, the formula assumes that a certain amount of parent's savings/investments are needed to be set aside for emergencies, and are not counted towards college expenses. That amount is often $40,000 to $50,000.

    In general, it makes sense to pay down debt and put money into IRAs and other binding retirement accounts in order to maximize financial aid. Money that is already in a retirement account does not count towards assets for college financial aid. Money that is put into a retirement account or a medical savings account during the current year will still be considered as income, but that retirement money won't be considered as an asset for the following year.

    Also, as you are aware, few assets should be held in a child's name. 529 accounts are treated like an asset of the parent, so they are better than savings in the child's name. Also, 529 accounts are very desirable so that the parent can control the money and make sure it is used for college. If it is not used for one student, it can be transferred to a brother or sister.
  • thumper1thumper1 Posts: 32,467Registered User Senior Member
    In general, it makes sense to pay down debt and put money into IRAs and other binding retirement accounts in order to maximize financial aid.

    Maybe and maybe not. What I would suggest to the OP...use one of the online financial aid calculators. Run your numbers WITH that "extra money" in the bank...then run them without that money in the bank. You may be surprised that the family contribution calculation isn't that much different.

    5.6% of $17,000 is $952. Is that really an amount that would make a huge difference in financial aid for you?

    As Swimcatsmom pointed out, the BULK of the EFC calculation is income...not assets (unless you have HUGE assets....$17K isn't huge). This bonus you received will be on the 2010 taxes...right...so it won't even come up as income on your 2011 tax return which is the one YOU will use for your kiddo's FAFSA numbers.
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