(Part 2 in a Series on the College Board’s 2012 Trends in College Pricing & Trends in Student Aid)
By Joan Marshall
Executive Director, College Savings Plans of Maryland
November 9, 2012

I am often asked by parents about whether their college savings will reduce their children’s future financial aid. My initial response is that – with student loan debt today surpassing credit card debt – it is generally in a family’s best interests to save whatever amount they can afford for college in order to reduce or maybe even eliminate the need to take on burdensome levels of future student loan debt.

This is particularly true given the treatment of 529 plan savings in the current federal financial aid formula. Generally, funds in a 529 plan are considered to be “parental assets” when a family completes the Free Application for Federal Student Aid (FAFSA) in order to be considered for “need based” financial aid. In the current formula, only about 5.6% of the funds saved in a 529 plan are counted as part of the family’s expected contribution towards the following year’s college expenses.

A wealth of additional interesting and helpful information was recently released by the College Board in their Trends in Student Aid 2012”.

First, some good news: In 2011‑12, undergraduate students received an average of $13,218 per FTE student in financial aid, including $6,932 in grant aid from all sources, and $5,056 in federal loans.

Federal grant aid almost tripled in constant dollars between 2001‑02 and 2011‑12, increasing from 20% to 26% of the total $185.1 billion in undergraduate aid. With the establishment of new federal college affordability programs, grant aid per full-time equivalent student (FTE) rose by 6% from the previous year, with the average undergraduate receiving about $6,900 in grant aid in the 2011–2012 academic year.

Student borrowing, however, is a mixed bag:

Including federal student and parent loans, as well as non-federal loans, total education borrowing declined by 4% in real terms between 2010‑11 and 2011‑12, which is the first decline in at least 20 years. However, the 2011‑12 total of $113.4 billion was 24% higher than five years earlier.

The reality is that most families are still required to pay a significant amount “out of pocket” for annual college costs, and a significant amount of financial aid continues to come in the form of loans. So what should parent do with all of this information? In my opinion, the best response is for families to take a “common sense” approach and save whatever they can reasonably afford – preferably in a 529 plan. This is one of the best ways to try to help your child realize the dream of higher education while hopefully avoiding excessive levels of future student loan debt.

About the Author:
Joan Marshall is the Executive Director of the College Savings Plans of Maryland, which offers both a 529 prepaid tuition program and a directly-sold 529 savings plan.  Together, the plans have more than 176,000 beneficiaries with investments of more than $3.3 billion as of June 30, 2012. Marshall is currently the Past Chair of the College Savings Plans Network (CSPN) and Co-Chair of the CSPN Federal Initiatives Committee.