Parents of a student who wants to receive a federal loan or scholarship must submit a Free Application for Student Aid (FASFA) and present information about their finances. Based on this form, an expected family contribution (EFC) will be calculated. Costs above the EFC can be covered by financial aid. In making the EFC calculation, the government doesn’t consider money in retirement accounts such as 401(k)s or IRAs. Taxable accounts, though, are counted as assets that are available for the child’s education expenses.
Say you’ve saved $100,000 for your son’s education in stocks, mutual funds, and bank CDs. Your neighbor has $150,000 in IRAs and 401(k)s. Even though your neighbor has $150,000 to your $100,000, his child will be eligible for more financial aid than yours because he invests heavily through retirement plans.
Thus, if you are hoping for financial aid to help pay for college, maximize your retirement plan contributions and minimize your other investments.
