Thursday, September 29, 2005

The More I Save, The Less Aid I'll Get Myth

As I was sitting in my baby carriage minding my own business and dozing off to sleep, I happened to overhear a conversation between my mom and one of her friends. My mom was was explaining about how we were already beginning my college savings to which her friend replied, "it's not worth saving money for college because the more you save, the less aid you're child will qualify for."

Well, this certainly woke me up and mom had to shove a pacifier in my mouth to keep me quiet. I had a conversation (well, I gurgled and listened) with my uncle about this concern and knew that saving money for college will reduce aid is largely a myth.

First off, it's important to remember that a lot of financial aid is in the form of loans. So when you have saved money, you're less likely to need to borrow money and thus won't need this form of financial aid.

There are a few issues that you need to be aware of that can help you save money while not affecting the financial aid that you qualify for. The main issue is that I don't want a lot of the college savings in my name. If the money I save for college is in my name, up to 35% of it may be counted against the aid distribution formulas. now if the money is in my parent's name, those same aid formulas will only count 5.6% of my mom's and dad's assets.

While the Coverdell ESA and 529 Plans are set up and meant for me, they're classified as "parental assets" instead of my assets under federal aid rules. Another aspect that makes them an appealing way to save for college.

While saving money now may mean that I qualify for a bit less in financial aid when I go to college, it certainly won't be a dollar for dollar reduction. I would much rather have the savings than the loans. While saving for college will reduce financial aid may be a convenient excuse for parents not to save, it's a false excuse that should be avoided.

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