Parents’ savings and assets are unlikely to jeopardize federal or state need-based aid for low- and moderate-income dependent college students, according to a new policy brief from the Center for Social Development (CSD). Even high levels of assets may have a small impact on need-based aid.
When students apply for federal need-based aid, the government uses financial and demographic information from the application to calculate the EFC
, determining the amount of need-based aid students are eligible to receive.
The main determinants of the EFC are parent and student income. Assets can also increase the EFC and decrease need-based aid, but many provisions in the EFC formula greatly reduce or eliminate the impact of assets, especially for low- and moderate-income students, according to the brief’s authors, Margaret M. Clancy and Sondra G. Beverly.
Assets do not affect the EFC for many students whose parents have adjusted gross incomes below $50,000. Many of these students qualify for a simplified EFC formula, which disregards all parent and student assets.
For students who do not qualify for a simplified EFC formula, there are important exclusions for certain parent-owned assets, including home equity and qualified retirement assets. An additional exclusion—the parents’ education savings and asset protection allowance—lets parents maintain a certain level of savings in case of an emergency and for future college expenses.
“Our most important conclusion is that parent-owned assets are very unlikely to reduce need-based aid for low- and moderate-income dependent students,” said Clancy, CSD policy director and director of CSD’s College Savings Initiative. This includes savings in Child Development Accounts
and other college savings, especially when held in a 529 plan. “When assets count toward the EFC, savings held in 529 plan
accounts have less impact on need-based aid than savings held in basic savings accounts,” she said.
According to the 2016 Annual College Savings Survey
from Savingforcollege.com, families are more knowledgeable about 529 plans than in previous years, but misconceptions persist, especially about the impact of savings on financial aid, Clancy said.
Student aid eligibility rules and formulas are complicated, and a growing body of evidence supports the notion that complexity hinders college access. Going forward, Clancy and Beverly write, inclusive college finance policies could rely less on a complex financial aid system and more on progressive subsidies
provided early in a child’s life.