By Jonathan Hughes, Associate Director of College Planning and Education, Massachusetts Educational Financing Authority

June 26, 2019

Financial aid is awarded based on two separate factors: merit and financial need. When you hear about academic, artistic, or athletic scholarships, these are examples of merit-based aid, granted in recognition of student achievement. In most cases, family finances are not considered when awarding merit-based aid.

Most financial aid is need-based. When applying for financial aid, you’ll be asked to submit financial aid applications, including the FAFSA. These applications will ask about your finances and household. Based on the information you report on the FAFSA, including your income, assets, taxes paid, and household size, you will receive an Expected Family Contribution (EFC). This figure is calculated using a federal formula which is intended to represent the amount you can absorb in college costs for one year. A low EFC means more eligibility for financial aid. Most people assume that saving for college will result in a high EFC, and therefore less financial aid eligibility.  This assumption is false.

What most people don’t know is that most of the weight in the EFC calculation is given to income, not assets. In fact, the EFC formula used by every college and university only takes into account, at most, 5.6% of parent total assets, which include all college savings accounts. This means, for example, if you saved $10,000 for college, the formula would only include no more than $560 of that in your EFC. So the impact of saving for college on financial aid is minimal. And if you’ve saved $10,000 for college costs, that means you’ll have $10,000 that you won’t need to borrow and pay back later with interest.

I’ve spoken with many parents over the years who are very concerned about the impact that saving for college will have on their child’s financial aid. But once I explain how the EFC formula works, their minds are put at ease. And in all my years working to guide parents through college planning, I’ve never spoken to one parent who has regretted saving. In fact, the most common sentiment I hear is “I wish I had done more.”

If you haven’t started saving for college, start now. To learn more about 529 college savings plans or compare your state’s plan to others, visit CSPN’s website.


About the Author

Jonathan Hughes serves as the Associate Director of College Planning and Education at MEFA, the Massachusetts Educational Financing Authority. Jonathan joined MEFA in 2001 as a loan counselor. As Associate Director of College Planning and Education, he is the point of contact for community-based organizations. He conducts seminars on college financing and the importance of saving for college. He is a member of the MASFAA Financial Wellness Committee and has a BA in Communications from Emerson College.