Help a Reader: Can Saving Money Hurt Financial Aid?

college 3D
Got an interesting email from a reader asking about financial aid stuff this week, but I couldn’t answer his questions for the life of me ;)  Some things I’m good at, and others I just have no idea whatsoever.  And this is one of those times — which is why he/we need your help! We both need to get schooled (bah dum, ching).

Got any advice, or thoughts, for Kevin?

I’m considering going back to school in a few years, and I’m trying to get ahead of the finances of it all. In a perfect world I’d be able to save up all the tuition and housing up front, but I’d like to get as close as possible. At the very least I’d like to put money away to at least take care of the books and other basic living expenses to minimize the amount of student loans I’ll need.

Now a bunch of different people are telling me not to do this because it will seriously hurt the amount of financial aid I’ll be eligible for. If the financial aid isn’t able to cover a good deal of the tuition, I’ll be unable to attend.

Do you have anyone who might now how that works? Should this affect other decisions in the mean time like opening a college fund for my daughter or an ira for myself or my spouse so that while I’m at school they are still gaining interest? Will the financial aid office really punish me for making wise financial moves in the mean time?

Re-read it again and it’s making me even MORE curious now. I told him he should call up the financial aid office of the school and just flat out ask them (said to maybe to go under a different name if he’s afraid! haha…), but that was the extent of my advice.  Now I just really wanna know too if you can get “punished” for saving up for school?! Seems so mad, really… Maybe you just get a different *type* of loan in that case? I have no idea.  Any of you had to figure this out before?

Either way, I will say that a) he should do his best to see what kinds of scholarships or grants are available to him, and b) that I back him, and anyone else, up who wants to go back to school.  I think it’s SMART as hell, despite the new age theories that it’s not financially worth it any more in this economy.  That’s bullocks. While there are always exceptions to the rule, I’m always siding with education being money well spent.

Now teach us, dear readers! Can saving up for college hurt you in the long run?

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  1. Wade February 18, 2011 at 8:44 AM

    I have seen this happen with my wife. My wife’s parents wanted to get her financial aid when she was an undergrad, but they couldn’t get any because of their saving over the years. However, when she went to professional school she was able to get student loans.

    Then again, I don’t know if it’s the same for every school, and you can always shop around for student loans through banks and credit unions. As J.Money pointed out, people should apply for every grant and scholarship that they believe they may be eligible for and hope for the best. I have also graduated with an MBA this past December and agree with education being “money well spent.”

  2. Olivia February 18, 2011 at 8:49 AM

    I’m presently in college…my parents diligently saved all through my childhood and are paying the full freight at my school. On the other hand, I have a friend whose parents were teenage parents and were not able to save nearly as much and she gets incredible financial aid.

    Yes, this is an extreme example…but the FAFSA looks at the amount of money in all of your accounts (with the EXCEPTION of retirement accounts). So, if you have less money in savings accounts, the more aid you’re eligible for.

    The sad part I think is that I was aced out of some scholarship applications (apart from the school) because of my parents’ income. Grants and loans I would understand…but scholarships should really be examining your own academic merit, regardless of your financial situation.

  3. MainlineMom February 18, 2011 at 9:55 AM

    It is true that financial aid officers look at how much you (or your parents) have in assets, and that includes equity in your house. This can certainly hurt you if you want to hold onto that savings and just use student loans, but it makes no sense to not save cash now just so you can get a bigger loan that you’ll have to pay off later. In my experience you can get the loans you need no matter what your current assets or income are, you just might have to dig a little harder to get them. It’s possible you will miss out on grants, which are financial aid you don’t have to pay back, but don’t let it stop you from saving everything you can now. I’ve heard the same advice from people as you’re hearing, but it’s totally counterintuitive and only for people who love their debt.

  4. Simon Zhen February 18, 2011 at 10:34 AM

    On FAFSA applications, students are asked to report their assets that do not include their (or parents’) retirement accounts and primary residence. Almost all other financial assets are used to calculate the estimated family contribution (EFC) – the lower that number, the more aid you get.

    A large amount of savings will certainly be factor in reducing financial aid. A friend in college (undergrad) started receiving a larger amount in grants when his parents got divorced. A family member who is currently in vet school (in-state), with under $1,000 in savings and under $7,000 in annual income, still finds herself borrowing student loans to pay for 75% of the tuition and about 15% covered by grants. The rest is coming from parents and scholarships. It shows that savings affects graduate school financial aid less than that of undergrad, but it seems to have an effect nevertheless.

    Tips: Submit FAFSA applications as early as possible (usually means you have to file your taxes early). Apply to in-state schools, which often means lower tuition.

  5. Bellen February 18, 2011 at 10:43 AM

    In reading the question post I immediately thought savings. But, what if the ‘savings’ were in
    food storage, clothes for future use, prepaid mortgage or rent, paying off the all the credit cards, getting gift cards, overpaying on electric or water so to have a positive balance, prepaying car and house/renter insurance, seeing the doctor and dentist before and maybe working something out with them? I don’t think any of that would be counted as assets. Also, look for outright scholarships or awards instead of loans. Even a job where the company would pay for some or all of your education can be a real help – and yes, you usually have to put out the money first and then be reimbursed.

    And, of course, learn to do with a lot less. The sacrifices made for education will pay off in
    the future.

  6. Kevin I February 18, 2011 at 10:59 AM

    Thank you guys so much, this is all really helpful stuff already. For more context if it helps, it’s three years of graduate school, in state, and I’m 27 and have been out of my parents house for a long time.

  7. JT McGee February 18, 2011 at 11:14 AM

    The FASFA is particularly backwards when it comes to student income.

    A dependent student is expected to contribute 50% of their income for school past $2,440 per year. Basically, it isn’t worth it for students to work if their parents are borderline middle class. The less a student works, the more aid they are qualified to receive. In some cases, the difference between a working student and nonworking student may be pretty large–a pell grant, or maybe the difference between a subsidized and non-subsidized loan.

    The takeaway is that the FASFA is not only complicated, but it is also a poor designed program. Why should we encourage a lack of savings and that students do zero work for pay during their college years? That doesn’t make any sense.

  8. HedgeHoncho February 18, 2011 at 11:16 AM

    If you can get punished, it’s terrible IMO.

    You can always stash that cash under the mattress like a gangsta instead ;)

  9. Ryan@FinancialStudent February 18, 2011 at 11:22 AM

    “Financial Aid” is somewhat of a misnomer. My parents are divorced, so I get to pick which parent I use to fill out the FAFSA, that is, only one income has to be reported. Both of my parents practically the same amount, slightly above the average US annual income, so in my case it didn’t really matter. The “financial aid” I was given was loans. I got absolutely nothing in free money from the government, unless you count the interest they are subsidizing on part of the loan. My dad then took out a Parent PLUS loan to fill the gap that my Stafford loan didn’t cover, although I’ll be making the payments.

    Graduate students are allowed to take out PLUS loans in their name, unlike undergraduates. Basically, Kevin, unless your income is extremely low, I doubt you’ll receive any “free” money anyway. Even with savings, you’ll still be eligible for federal student loans.

  10. CityFlips February 18, 2011 at 11:25 AM

    I don’t know all the ins and outs of this situation, but I would say student loans aren’t going to cover all costs. Saving money seems like the smart thing to do. If Kevin is a non-traditional student, which I believe is defined as anyone over 25 going to get a bachelor’s degree, there are usually great scholarships available. I’m sure it will all work out. I too agree that education is SMART. It may not be for everyone and there are certainly many successful people in this world who do not have college degrees, but I disagree with people who say a college degree is not worth it anymore.

  11. Alotta Lettuce February 18, 2011 at 12:12 PM

    OK. I’m NOT an expert, but I do know a thing or two because I had to navigate the wacky world of financial aid all by myself when I was in college, so here’s my take.

    First and most important question: WHAT is he going back to school for? If it’s his Bachelor’s Degree, then he might have some legit concerns regarding how his savings might affect his NEED-BASED aid (and that’s ONLY if he’s going for his FIRST Bachelor’s Degree). If he’s planning to go back and get a second Bachelor’s Degree or an advanced/professional degree, then it’s mostly a non-issue, because there’s no such thing as need-based aid (in the form of grants) for advanced degrees. There ARE ways to get out of paying for advanced degrees yourself – namely assistantships and fellowships – but these are almost always merit-based rather than need-based.

    So, assuming he’s talking about getting a first Bachelor’s Degree, any non-retirement savings he has WILL be used to determined his EFC – Expected Family Contribution – which will in turn be used to determine how much NEED-BASED aid he qualifies for. AND RIGHTFULLY SO. It might feel like “punishment” for being responsible and saving money, but the bottom line is that need-based aid is for people who NEED it, not people who’d rather not spend their own money on their own education. If you have thousands and thousands of dollars in the bank, you don’t NEED Pell Grants or SEOG Grants. Those are for people who DON’T have thousands and thousands of dollars in the bank. Having a little bit of money in savings isn’t going to wholly disqualify you from receiving need-based aid, but having A LOT of money might. That said, I don’t know where the feds draw the line between having a little and having a lot.

    OK, so now that we’ve got the need-based part of the financial aid equation out of the way, I’ve got some good news: Your EFC doesn’t play a roll in determining how much money you can borrow in student loans. There are limits to how much students can borrow, but they don’t vary from student to student based on their financial standing, they’re just max-caps that apply to all students across the board. This applies ONLY to federal loans. Private lending institutions operate completely differently.

    So. Long story short: Having a lot of money in non-retirement savings WILL affect your NEED-BASED aid, because just by virtue of having a lot of money in savings, you don’t NEED need-based aid. However, it will NOT affect the amount of money you can borrow in the form of student loans.

  12. Alotta Lettuce February 18, 2011 at 12:18 PM

    Also, to Mainline Mom: Equity in your primary home has absolutely no bearing on the calculation of your EFC. A second home, however will.

  13. Jen February 18, 2011 at 12:38 PM

    Since you are asking a question on a personal finance site, and are in your late 20’s, I’m assuming you already have some retirement savings.

    BUT, if you aren’t contributing the max to your ROTH IRA, consider putting your “college savings” into this investment. Financial aid offices generally do not consider retirement accounts when calculating your award. That way, when it comes time (as long as you meet the 5 year threshold), you can pull out your contributions without penalty.

    Even if you don’t meet the 5-year threshold when you start school, you could always take out a loan (since that is what most financial ‘aid’ packages consist of anyway) for a couple years until you hit the 5-year mark, and then withdraw your contributions to pay off the loan.

  14. Jenna February 18, 2011 at 12:45 PM

    I’d called the school and get solid answers. In the meantime contribute to you and your wife’s IRA and start a 529 plan for your daughter. That way you aren’t tempted to spend the money while waiting for answers.

    Are you planning on going to a for-profit school? What about your employer can they help pay for additional schooling?

  15. Kevin I February 18, 2011 at 12:54 PM

    @ AlottaLettuce It is for a graduate degree. When I picked up an info packet from them there was a section for merit based aid and a much smaller section for need based, so after reading what you said I’m going to assume that’s a private thing instead of a public one and would probably be bound to it’s own set of rules that I will need to learn. Thanks for that heads up, it will make me much more educated for my discussion with the financial aide folks. I agree that these things should be based on need and having enough savings would defeat that purpose and don’t want to seem out for free money so I can live large while I study :) and loans where my main concern. The problem I’m facing is I could possibly save for the tuition or the housing, but not both, and my biggest concern was that saving for one would preclude me from getting help with the other.

    @Bellen and @Jen Those are some slick pieces of advice, maybe the issue isn’t as much of how much I save but rather how I save it!

  16. LB February 18, 2011 at 1:02 PM

    One of my dreams and financial goals is to go back to school. I never finished and have been looking at ways of getting help. One of the greatest tools out there is the FAFSA4caster on the home page. You can tweak it all you want to see what type of benefits you get. From playing with it I have found out, if I contribute to my 401k that money is counted, but if I have a 401k that isn’t counted. If I have an emergency fund, that money is counted. If I get divorced I could have a full ride even if I had a decent paying job and if I stay married I don’t get any money. So, check out the FAFSA4caster, it is a great tool to find out how much financial aid you will get before submitting your paperwork.

  17. J. Money February 18, 2011 at 1:25 PM

    Guys!!! GREAT INFO!!!! wow. I don’t know why I’m impressed, but I am ;) I should have known you’d pull this stuff out, haha… I think the ideas on “saving” differently are freakin’ great. Thank you all for putting so much thought and time into these comments — Kevin just emailed me and said he was really thankful – it’s all helping!!!! I love you y’all.

  18. aj February 18, 2011 at 2:32 PM

    I was going to suggest a Roth as Jen already has.

    That was my plan for stashing any extra $$ in a ROTH so I can still withdraw any deposits without penalty, but it would not count against us when my daughter goes to college in a few years. I am not sure if there is a 5 year threshold for a ROTH 401k as there is with the IRA. Definitely something to check into!

  19. Tawni February 18, 2011 at 2:38 PM

    I have three kids approaching college age, and last month I checked out the book “Debt Free U” (by Zac Bissonnette). Before reading it, I’d never understood how the financial aid calculations are made; I can’t neatly summarize them, but if you want more info I’d definitely recommend that book.

  20. Travis @ GayFinancialPlan February 18, 2011 at 2:39 PM

    I agree 100% with Jen’s post from above. I don’t know how FAFSA calculates your need for financing based upon your existing assets, but if that is a major factor, definitely consider the Roth IRA. As long as the contributions have been in the account 5 years, there is no 10% early withdrawal penalty, and retirement accounts aren’t included on the FAFSA. Keep in mind, however, you can’t withdraw the earnings without the penalty. So, this hinders your ability to put that cash towards college, but at least you’ll have it for retirement.

  21. Jenna February 18, 2011 at 5:05 PM

    Probably more than you ever wanted to know about federal student aid:

    Unless you have a very low income, it seems unlikely you’d get any grants, and the only other options are work-study and loans. And you should be able to take out as much in loans as you want, not how much they *think* you need. I went from undergrad straight to grad school, so even with my practically $0 income, I had no federal grants or work-study in my aid package.

    Seems to me you should just save up like you are doing (good for you!), apply like crazy for outside scholarships, and be prepared to take out loans if necessary. Also, talk to the school about merit-based scholarships. When I applied to grad school, the school I wanted to go to was MUCH more expensive than the other school where I had applied. I asked if my preferred school would consider me for a scholarship, and they ended up awarding me $10k. Never hurts to ask!

  22. Sarah February 18, 2011 at 7:09 PM

    Ugh. My parents have been saving diligently for my brother and my college tuitions. When I turned 18, they transferred all the assets into MY name, which was awesome because I got to manage everything (Finance major…I’m nerdy that way) but horrible because it essentially disqualified me from any financial aid.

    When my brother applied for financial aid, my parents hadn’t yet transferred his accounts into his name, but even then my parents made too much money for him to qualify for much of anything. I believe FAFSA offered him something like $75/year for tuition. So yeah, I figured I wasn’t missing out on anything by having my accounts in my name.

    That probably did not help you at all, now that I think about it…sorry! All I know about FAFSA is that my parents make too much for me to qualify for much of anything, so I just never bothered with it.

  23. Jen February 19, 2011 at 1:57 AM

    One more thought:

    My husband works for the state university system here in Arizona, and we both get free tuition (we’ve saved about $5k so far). That simple – work for the system, get free tuition as a benefit. Look into it in the state you plan to attend school and see if that’s an option.

    It might not be the most glamorous job – janitor, kitchen staff, etc – but it might be worth it to save so much money!

  24. Olivia February 19, 2011 at 8:41 AM


    Very true! My parents have plenty of friends who engaged in “FAFSA avoidance plans”–i.e. “It’s the perfect time to buy some big, new, expensive toy that I buy for only cash!”

  25. Monroe on a Budget February 19, 2011 at 12:11 PM

    Following up on the reader who said use savings to pay down / pay off debts and stockpiling or buying ahead for your needs: I’ve heard that from other financial aid experts. It’s worth considering. Nobody will ask on financial aid applications how much you owe on credit cards, so you may as well pay those bills down before filing and lower the balance of the accounts that do need to be reported.

    To answer the overall questions, go to – lots of practical FAQs for college financial aid on that site with topics ranging from divorced parents to the fact you should file FAFSA even if you (think) you won’t get any grant money. Reason: the fact that you filed FAFSA is expected by many other programs. Very few agencies or sponsors will pay your entire college bill, so they want to make sure you are seeking out all available funds.

    Really fantastic article here:

    Also be aware that in addition to FAFSA, many colleges also request the CSS Profile, which asks far more detailed financial questions. The nice thing about the otherwise annoying CSS application is that there will be a section in which you can write a couple of paragraphs to explain extenuating circumstances or numbers that wouldn’t make sense at first glance.

  26. Chris @ My Money Mess February 19, 2011 at 2:20 PM

    “In a perfect world I’d be able to save up all the tuition and housing up front, but I’d like to get as close as possible. At the very least I’d like to put money away to at least take care of the books and other basic living expenses to minimize the amount of student loans I’ll need.”

    Part of the confusion and the mixed up advice he was getting has to do with the terms. Financial aid is a broad term that includes grants as well as loans. Money in savings and so forth should not affect how much you’re able to borrow as has been covered by others. My big question is why borrow at all? Unless you’ve got some assurance of being hired almost immediately upon completion of your degree, in the long run you’d be better off financially saving enough to pay the tuition in cash.

  27. Kim February 20, 2011 at 12:34 AM

    Grants for education are not nearly as common as they used to be. My parents didn’t have savings for my education. My savings were worth about $400 total. As the oldest of 6 children, and with low enough income, I got considerable financial aid… but it was predominantly in Stafford Loans, Perkins Loans, and Work-Study. The little bit I had in Pell grants did not go far, and I can remember being in college and reading news as the Legislature cut back funding and eligibility for grants even more.

    So I will reiterate what others have said, please do not count on Financial Aid to allow you to graduate debt-free. These days, most aid comes in the form of loans which must be repaid (they can garnishee your wages if you don’t!)

    Do file the FAFSA as early as possible, as there is an element of first-come, first-served to it. (If you ever find yourself starting college late in the year less-prepared, do file the FAFSA “late” anyway, just be early the next year.)

  28. J. Money February 20, 2011 at 5:21 PM

    Again — You guys are AWESOME!!! All great info for our boy to consider, THANK YOU :)

  29. Sandy @ yesiamcheap February 20, 2011 at 9:08 PM

    Yeah, with everyone else I make sure to not have any money in my accounts, well I DIDN’T have any money anyway to make sure I qualified. It’s ass backwards but unfortunately that’s how it is.

  30. Mary Johnson February 23, 2011 at 2:26 PM

    This is a great question. As the financial literacy program manager for Higher One, Inc., I get a lot of questions related to student aid and have learned that a lot of myths exist, especially around whether or not savings will impact the amount aid received. While there are many sources of financial aid, eligibility (for both grants and subsidized loans) is based on what is called your Effective Family Contribution, or EFC, which determines how much a family should be able to pay toward college. To determine your EFC, you are required to submit the Free Application for Federal Student Aid (FAFSA). While your assets are taken into account, it is only a percentage of them and some assets – such as retirement plans – are sheltered.
    Also keep in mind that a good portion of financial aid comes in the form of student loans which must be paid back with interest, so the more you are able to save, the less you will have to borrow and eventually pay back. You should try and limit your loans and take out only what you need, and saving is a great way to do that.

  31. Ginger February 26, 2011 at 5:58 PM

    If you are applying to grad school, talk to your department. Ask if the department has TAs or RAs, that can really help your budget. Also, TAship can be considered work study so it is not counted against you for financial aid. You can also come over to my site, it is for frugal students. I would also recommend paying down any debt you have and maxing out your Roth IRA before grad school.

  32. marie April 5, 2015 at 12:14 PM

    I took the smart saving approach and got punished. Took 4 years off between undergrad and graduate school, worked and paid off my loans. The financial aid office told me that I won’t get any aid because I have less debt than my classmates going from college straight into graduate school and because I have worked full time (never mind that I have no savings because all the salary from that full time work went into paying off loans). So, essentially, I’m in the same amount of total debt I would have been had I jumped straight into grad school, but I’m now 4 years older and effectively setting my life back those 4 years for nothing. Kids, a house, a wedding? Right when I graduate I’ll be 30 and not able to afford any of those things.

    1. J. Money April 6, 2015 at 1:28 PM

      Ack, so sorry to hear :( At least you’ll have good work experience under your belt, eh? Maybe you’ll meet your spouse in grad school now that you waited 4 years :)