You can save in a variety of ways, such as 529 college savings plans, custodial accounts and Coverdell accounts. But regardless of how long your family has been saving or how much has been saved, federal financial aid may be available.
All families applying for financial aid must complete the Free Application for Federal Student Aid (FAFSA). You can apply for federal aid beginning Jan. 1, 2014, for the 2014–2015 academic year. Keep in mind, there are other state and college deadlines, so it’s important to check www.fafsa.ed.gov (http://www.fafsa.ed.gov)
Federal financial aid is need-based and determined by one equation:
Cost of Attendance (COA) - Expected Family Contribution (EFC) = Financial Need
Income and Assets Affecting EFC
Understanding how the federal financial aid system views income and assets will help you develop a more realistic expectation of your potential financial aid eligibility. Here is how certain income and assets affect the EFC calculation:
*Parent- or student-owned 529 and Coverdell accounts – These accounts are considered an asset of the parent and are required to be disclosed when applying for financial aid. Distributions from these accounts do not count as income on the next FAFSA filed. Custodial accounts (UGMA/UTMA), on the other hand, are considered an asset of the student. Distributions from these accounts must also be disclosed but do not count as income in the following year.
*529 and Coverdell accounts not owned by the parent or student – These accounts are considered an asset of the owner and therefore are not required to be disclosed when applying for federal financial aid. However, distributions from these accounts are reported as the student’s income for that year on the next FAFSA filed, so you may want to delay such transactions until the student's final year of college.
*Retirement accounts – The federal financial aid formula does not include retirement account balances in assets. However, distributions from these accounts (whether taxable or not) and Roth conversions are counted as income for that year on the next FAFSA filed.
Remember, whatever you can save today can help your child or grandchild graduate with less debt to repay in the future.
Edward Jones does not employ financial aid experts or give financial aid advice. This is a highly specialized field, and specific questions should be directed to a qualified financial aid officer. This does not include most tax professionals.
This material is offered for broad, informational purposes only. Many important details of the federal financial aid system are not mentioned or fully described. The information provided is a simplified explanation of the federal financial aid system and how savings vehicles fit into it.
This information discusses federal financial aid only. Information on aid from schools and states and on private scholastic and athletic scholarships is not provided.