By Troy Montigney, Executive Director, Indiana Education Savings Authority

February 28, 2019

There are many widely held misconceptions about financial aid. One of the most prevalent is that families should not save for higher education ahead of time because doing so will significantly damage their chances for need-based aid. Even more common is the perception that the aid process is simply too complicated to navigate, and the formulas too difficult to understand.

Fortunately, parents don’t have to choose between the pursuit of aid or accumulation of savings as their only strategy. The reality is the expected family contribution (EFC) determined by information entered on a student’s Free Application for Federal Student Aid (FAFSA) is primarily income-driven.

Simply put, a higher household income results in a higher EFC and lower eligibility for need-based aid. Beyond that, your assets can have a minimal effect. To simplify, we’ll talk about some of the most common types of assets:

  1. Retirement balances like your work-based 401(k) plan (or anything similar) and IRA accounts are not counted at all. Neither is home equity, or the amount of your mortgage you’ve paid down if you’re a homeowner.
  2. After full exclusions like these, the first $20,000 of parental assets – whether in checking accounts, savings accounts, 529 Plans, etc. – are not counted in the EFC.
  3. Any additional parental assets are only counted at a rate of up to 5.64 percent. This rate can also be affected by income, so the actual impact on your EFC might be lower. For some income levels, assets might even be disregarded entirely!

So, for every $1,000 you save, the most you’ll be “expected” to put toward your loved one’s higher education is $56.40. When it comes to a 529 Plan, this doesn’t mean you should use the other $944 and change for whatever you want, but it shows the special treatment assets like 529s are given when it comes to financial aid.

Just as many individual states give up-front tax incentives to encourage contributions to their own 529 Plans, at least 17 [1] have also decided to completely exclude 529 plan balances for state financial aid purposes.

Eligibility for these state programs is also primarily income-driven, but they are often the most attractive form of aid available, with many covering up to four years’ tuition at public, in-state institutions – and the institutions sometimes offering companion benefits like free room and board. In addition to not hurting eligibility, 529 plans can complement them further and cover extra expenses like books, required supplies, and a computer.

Saving for any major expense is a significant commitment. Paying for college often ranks alongside planning for retirement as the two most daunting of those we will make. But it’s especially important to remember that making a commitment to save for education now doesn’t cause undue harm later.

[1] Arizona, Georgia, Indiana, Iowa, Kentucky, Michigan, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, New York, Pennsylvania, Rhode Island, Texas, West Virginia, Wisconsin. Before you invest in any 529 Plan, you should consider whether your or the beneficiary’s home state offers any state tax or other state benefits such as financial aid or scholarship funds that are only available for investments in that state’s qualified tuition program. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when deciding to participate and invest in any 529 Plan.


About the Author

Troy Montigney is the Executive Director of the Indiana Education Savings Authority (IESA), working to grow participation and investment in the state’s tax-advantaged CollegeChoice 529 program beyond the current 365,000 accounts and $4.6 billion in assets. Learn more by visiting or calling 1.866.485.9415.