Your savings could cost you a reduction in financial aid eligibility. Particularly when you are applying for federal financial aid that is based on financial need, which is calculated calculated by subtracting your expected family contribution from the cost of attendance. Ironically, having saved up your own money means you might qualify for less aid, but this can also be a good thing when you consider that student loans aren't free money and repayment can suck away your chances at building your savings after you graduate.
Federal Financial Aid
Student loan eligibility is determined by the information a student submits on his Free Application for Federal Student Aid, the FAFSA. This application requires the student to disclose his assets -- including the balance of his savings account. It is used to calculate the expected family contribution. Dependent students must also disclose their parent's assets. The cost of attendance must be greater than the expected family contribution for the student to be considered for student loans.
Private Student Loans
Sometimes students will take out a private loan to help cover education expenses, which will require the student to pass a credit check. However, passing the credit check with flying colors does not mean you will get a private student loan. A savings account will reduce how much a student can borrow in private loans the same way it reduces the amount available from federal student loans. Private loans are used to finance the gap between the cost of attendance, federal financial aid the student receives and the expected family contribution.
Questions 40, 41 and 42 on the FAFSA ask for student asset information. The balance in your savings account as of the date you complete the FAFSA should be included in your answer for question 40. Twenty percent of a student's assets are used in determining the expected family contribution. This means that your eligibility for student loans can be directly affected by the dollar amount you list. You will not be eligible to borrow money to cover education expenses with a student loan for the 20 percent you are expected to cover from your savings account. Consider keeping savings in a 529 account instead, as this kind of account is assessed much lower than traditional savings when your financial aid is calculated.
Questions 88, 89 and 90 ask about parents' assets and are only weighted at 5.64 percent when calculating the expected family contribution. For divorced parents, only the custodial parent's assets are counted. Savings that is kept in the parents' name will have less impact on student loan eligibility. Depending on individual circumstances, it may make sense for parents not to gift money to their child, but instead pay any money they wish to contribute directly.
Sara Mahuron specializes in adult/higher education, parenting, budget travel and personal finance. She earned an M.S. in adult/organizational learning and leadership, as well as an Ed.S. in educational leadership, both from the University of Idaho. Mahuron also holds a B.S. in psychology and a B.A. in international studies-business and economics.