How to Save for College Without Affecting Financial Aid

Many parents want to provide the world for their children. This usually includes saving for college expenses in hopes that their children can avoid using student loans. But saving for college can affect a student’s ability to qualify for financial aid, which could mean missing out on free money for school. 

Parents wishing to start a college fund may want to consider how to save for college without affecting financial aid. Understanding how financial aid is calculated and planning ahead can be first steps to take when deciding to save for college.

How is financial aid calculated? 7 factors 

Financial aid for college can come in many forms: scholarships, grants, loans, and work-study jobs. A student’s college or home state, or the federal government may offer these types of financial aid. Ideally, students want to qualify for more grants and scholarships rather than aid such as loans they will eventually have to pay back. 

A Free Application for Federal Student Aid, or FAFSA, form is required to be completed each year to be eligible for federal aid as well as aid in many states. Federal Student Aid, a part of the U.S. Department of Education, uses the information provided on the FAFSA to calculate the expected family contribution (EFC), which is an estimate of what the student and their parents can contribute toward school costs. 

Colleges, universities and other eligible schools use the EFC to help determine the amount of federal, need-based financial assistance awarded to each student. The FAFSA uses income from federal tax returns and savings, checking, and investment account balances for the student and parents from two years before the student applies for aid. For example, for the 2022-2023 school year, income information is used from 2020. This is known as the “base year.” Several factors determine a student’s need for financial aid:

1. Cost of attendance (COA).

   The cost of attendance is the total cost to attend school including tuition, books, fees, supplies, transportation, and room and board. Each school has its own COA on its website. The COA limits how much financial aid a student can receive because the COA minus need-based aid, such as grants, and private scholarships equals the maximum amount of federal loans that a student can borrow.      

2. Expected family contribution (EFC).

   The EFC is an estimate of what a family can contribute to a student’s cost of attending school. A formula set by federal law considers the student’s and parent’s income and assets to calculate how much aid the student may be eligible to receive. Assets including checking and savings accounts, stocks, bonds, CDs, and other non-retirement accounts are taken into consideration. Student assets count toward EFC at a higher rate than parents’ assets, 20% and 5.64% at most, respectively.  

3. Financial need.

   Financial need is the difference between the cost of attendance and the expected family contribution. Need-based aid includes subsidized federal loans. The Department of Education pays the interest for students enrolled at least half-time, and for six months after a student leaves school. Subsidized loans offer more favorable interest rates than unsubsidized loans, which are not based on financial need and the student is responsible for paying accrued interest. Other need-based aid includes Pell grants and work-study jobs.  

4. College financial aid policies.

   Some schools use the FAFSA formula to determine the financial aid they will offer students; other schools have their own formulas, which may consider additional factors like the values of the family home or a family’s small business. 

5. Enrollment status.

   A student’s status includes part-time, full-time, and three-quarter time, for example. This can affect the financial aid calculation when determining a student’s financial aid needs. A change in status can also impact aid. For example, dropping below half-time may reduce or eliminate aid and trigger the repayment grace period on student loans early. Dropping below part-time with subsidized loans, can begin interest accrual. 

6. Independent versus dependent student.

   This can impact EFC calculations. Dependent students must report their status and financial information along with their parents since parent assets are taken into consideration when determining EFC. Independent students only have to report their individual information (unless married)—and only their individual assets are considered for the EFC. There are many different reasons a student might be an independent student, including being 24 years old, a member of the armed forces, married, or having a dependent of their own other than a spouse.   

7. The number of people in the family and attending college.

   The FAFSA formula and the Institutional Methodology (IM) formula, a formula sometimes used by private schools to calculate the EFC, requests the number of people in the family and those who are attending college in the same year. Families with more than one child in college may have their EFC reduced for each child, which would allow a child to qualify for more financial aid. However, the FAFSA formula is phasing this factor out of the formula with its anticipated completion for the 2024-2025 award year. The IM may still reduce the family’s contribution with additional children in college. 

Together, these factors influence a student’s financial need. The basic calculation for financial need, which includes Pell grants and work-study, is the cost of attendance minus the expected family contribution.

Cost of attendance (COA) - expected family contribution (EFC) = financial aid need

For example, if the COA is $12,000 and the student’s EFC is calculated to be $4,000, the student’s financial need is $8,000. The maximum amount of need-based aid this student can receive is $8,000.  

12,000 - $4,000 = $8,000

If a student needs additional funds, federal unsubsidized student loans are an option. To calculate non-need based, subtract all aid the student receives from the COA. In this example, the COA at $12,000 minus the aid of $8,000 equals $4,000, which is the limit the student can receive of aid not based on need

Cost of attendance (COA) - total need-based aid = non-need-based aid

12,000 - $8,000 = $4,000

Does a savings account affect financial aid? 

Yes, a savings account affects financial aid. It is considered an asset that students and parents must include on the student’s FAFSA application. The savings account balance counts as an asset  when calculating the expected family contribution. 

The savings account’s impact on the financial aid depends on who owns the account. A savings account that the student owns would affect the financial aid more than accounts owned by the parents. This is because accounts owned by parents contribute 5.64% at most, while 20% of student-owned assets are included in the calculation.

How is a student’s EFC calculated?

A dependent student’s expected family contribution is calculated using the student’s and parents’ income, assets of both, and gifts from others. The Federal Student Aid site includes a worksheet for students to calculate an estimated EFC. The EFC is not required to be contributed by the family, but it reduces available financial resources. This is how the different factors contribute to the EFC calculation. 

• Income.

  The expected family contribution calculation uses the student’s and parents’ incomes. Income is heavily weighed in the formula and influences the EFC the most. A student's income weighs greater than the parents' income since 50% of the student's income is attributed to the EFC versus the range of 22% to 47% of the parent’s income. More income can result in less financial aid eligibility, so reporting accurate numbers on the FAFSA is essential. The adjusted gross income from previous tax returns can provide accurate information.   ‍

• Assets

  . The FAFSA requires information about assets that belong to the student and parents. A student’s assets are those held in the student’s name and 20% of those assets—including savings accounts, investment accounts, and real estate—count toward the EFC. A parent’s assets include savings, investments, prepaid tuition plans, 529 college savings plans, Coverdell education savings accounts, investment real estate, and some business interests. There is a range, but at most, the EFC calculation uses 5.64% of parents’ assets. ‍

• Gifts from others.

  Monetary gifts can count as an asset at the time of the FAFSA filing. It may be considered income depending on when it’s received. Scholarships are generally not considered gifts but may be considered taxable income depending on the scholarship guidelines. Up to 50% of the gift amount may have to be reported as income on the FAFSA. Some schools may use the total gift amount to reduce aid with their own calculations. 

The bottom line

The need for financial aid is determined by numerous factors including the school’s cost of attendance, the expected family contribution, and the student’s financial need. Saving money for a child’s college expenses can be helpful but can reduce a student’s financial aid. 

Any income and assets of the children and parents are factored into how much financial need-based aid is awarded. The parents’ financial information has less of an impact on financial aid than the student’s financials. Certain assets such as the value of the family home and retirement accounts, are excluded from the FAFSA and do not impact financial aid.