Don't Be Afraid to Save; Student Aid Eligibility Is Not Decreased by College Savings

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NASFAA Experts Available to Offer Savings Advice During National College Savings Month

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Not only do savings reduce the need to borrow, but studies have shown that students and families that save even small amounts of money for college are more likely to attend.

In honor of National College Savings Month, the National Association of Student Financial Aid Administrators (NASFAA) reminds parents, students, counselors, and other interested parties that the benefits of setting money aside for a student’s college education far outweigh the drawbacks.

According to a recent Sallie Mae/Ipsos study, 10 percent "fewer American families with children under age 18 save for college than did just two years ago." Of those who reported they were not currently saving, nearly half cite a barrier other than not having the money to do so.

Among the most prevalent reasons for not saving, according to the study, was the idea that children would be awarded enough financial aid to cover the cost of college. While financial aid can go a long way to help make a college education more affordable, the advantages of having savings cannot be denied.

“Any savings that a family can contribute toward a student’s higher education costs is beneficial because it reduces the need to incur debt through borrowing," said NASFAA President Justin Draeger. “It’s never too early to start a savings plan for your child, as even a small monthly investment can grow to a significant college fund by the time the child graduates high school. For example, saving $100 a month from birth to age 17 would yield about $40,000. That’s $40,000 less your family will have to borrow to fund a child’s education.”

Qualified Tuition Programs, also known as 529 savings plans, are operated by state or educational institutions and designed to help families put away money to offset the future costs of postsecondary education. There are two types of 529s:

-- Under a 529 College Savings Plan, your investment grows tax-deferred, and distributions to pay for the beneficiary’s college costs come out federally tax-free.

-- A 529 Prepaid Tuition Plan let you lock in future tuition rates at in-state public colleges at current prices and is usually guaranteed by the state.

While these savings plans were previously factored into the Free Application for Federal Student Aid (FAFSA) application as a resource, that is no longer the case. Under the Higher Education Reconciliation Act of 2005, these plans are now treated as assets of the account owner -- meaning they have a lower impact on financial aid eligibility. Additionally, distributions from a college savings plan have no impact on student aid eligibility.

“Not only do savings reduce the need to borrow, but studies have shown that students and families that save even small amounts of money for college are more likely to attend,” Draeger added. “Due to asset protections and allowances for retirement and family emergency needs built into the federal formula that determines aid eligibility, the expected family contribution (EFC) typically incorporates only a small portion of parental assets. So don’t be afraid to save.”

About NASFAA

The National Association of Student Financial Aid Administrators (NASFAA) is a nonprofit membership organization that represents nearly 20,000 financial aid professionals at more than 3,000 colleges, universities, and career schools across the country. NASFAA member institutions serve nine out of every ten undergraduates in the U.S. Based in Washington, DC, NASFAA is the only national association with a primary focus on student aid legislation, regulatory analysis, and training for financial aid administrators. For more information, visit http://www.nasfaa.org.

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Beth Maglione
NASFAA
+1 (202) 785-6944
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