One of the problems students and their families run into when trying to figure out how to pay for college is that their assets are counted “against” them when the student’s need is calculated for financial aid purposes. When a student fills out her annual Free Application for Federal Student Aid (FAFSA), the student’s assets and earnings, as well as those of her parents, will all be included in the calculation used by the federal government and the school in determining financial need. So, even if your savings isn’t enough to get close to paying for college, it will still reduce your ability to get financial aid.
That being said, it doesn’t mean you should stop or avoid saving simply to increase your ability to get financial aid. Rather, you just need to be aware of what will be considered in making the calculation. Armed with such knowledge, you will be able to maximize your saved assets, utilize them in the appropriate order and increase your eligibility for financial aid.

The first assets that you need to take a look at are those that will reduce the aid your eligible to receive. For students, this will mean 20% of everything you have: savings, investments, stocks, bonds, cash, real estate…whatever. If the federal government considers it an “asset,” it will reduce your financial aid eligibility. If it is an asset that is not specifically earmarked for college, that won’t matter to the government but it will make things quite a bit stickier on the financial side for you. Next, you will be expected to contribute half of everything you earn, after an allowance of approximately $6,000, toward the cost of your education. Fair enough, but if you spent it, it will still count against your aid eligibility.

As far as your parents are concerned, if you are a “dependent” for financial aid purposes, their income and assets will reduce your ability to get financial aid, even if they are not actually contributing a dime to your education. Parental income will reduce aid eligibility, and parents, in addition, will be expected to contribute nearly 6% of their total assets toward the cost of a student’s education. This can certainly put a crimp in parents’ retirement or remodeling plans, let alone their day to day budget. If you’re a student whose parents are unable to help, this bit of calculus will do nothing but make it harder for you to pay for college.

One spot of good news is that the assets of extended family members such as grandparents typically do not come under consideration when the government or your school is weighing your financial need. Thus, if you believe you will need considerable financial aid in addition to your own or your parents’ savings, it may be worth your while to be nice to granny and gramps and make sure their on your side when it comes to school. They can open a savings (for purposes of this post, savings is really anywhere your putting your dollars or assets for the purposes of future use, not just bank savings) investment account in their names and you could contribute to it with the understanding that the principal and proceeds will be used to cover your college costs. Another way your grandparents can help is to open a Section 529 College savings account on your behalf. This is a double edged sword, though. In the initial aid calculation, the assets of the account will not be counted against your aid eligibility. But when proceeds are withdrawn and used to pay for your college, they will be considered income payable to you. Because of this, some experts recommend that you wait until you file your final FAFSA — usually in January during your junior year — before tapping assets tof which your grandparents have custody.

As far as your own assets, as well as those of your parents, there is a basic order in which you should access them for school in order to maintain maximum aid eligibility as you continue with college. First, use your own savings, section 529 accounts, or anything specifically intended to be used for your education. Ideally, this will have the double benefit of paying for the early part of college and reducing your assets for future aid eligibility. If you have two years of college saved up, it may be wise to split them, if you can, between yourself and an account owned by an extended family member. This way you can maximize the time value of money on half of your savings, as well as your financial aid eligibility for those years you don’t have enough saved for.

Tapping into or borrowing against retirement savings is generally a bad idea. College graduates ideally will have a lot more time to pay off any loans that they may need to take out than parents will have to replenish depleted 401(k)s or pensions. Most important, before accessing any assets that were not specifically intended to pay for college, be sure to consult a financial or tax professional. College is expensive enough without also having to spend additional dollars on taxes, penalties, interest and lost investment income.