How saving might be hurting your financial aid chances

September 30th, 2011 by rebeccac

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Courtesy of o5com via Flickr

Going back to college can get pretty expensive, so it makes sense to start putting away money for it as soon as possible, right? Build up some savings to complement any financial aid that you qualify for?

An article in today’s The Atlantic claims that may not be the smartest move after all.

A lot of it comes down to the FAFSA – the Free Application for Federal Student Aid – which you have to fill out if you want financial assistance with college. When the government is calculating how much award money you get from programs like Pell Grants and Stafford Loans, it throws everything into the equation – your income, your investments and your savings. If you have the cash socked away, the government figures you ought to use it for tuition and related expenses.

To a certain degree, that makes sense. But on the other hand, there a couple of flaws in this idea of throwing savings into the mix. 1) The government has no idea what your savings are for – maybe it’s been for college, but maybe it’s for big medical expenses. Or maybe it’s for your kids’ education. And 2) FAFSA essentially punishes people for exhibiting financially responsible behavior.

In his Atlantic article, Daniel Indiviglio gives an example based off a hypothetical student coming from a 4-person household where the combined income is $40,000:

• Student A has zero savings in the bank and gets awarded $4,000 in Pell Grant money.
• Student B has $50,000 in the bank and gets awarded $3,800 in Pell Grant money.

Is that a startling difference? No, and Indiviglio acknowledges that. But the big problem comes when one considers that FAFSA’s policies create a trickle-down effect. In order to simplify their financial aid processes, most colleges utilize the FAFSA information and copy their priorities in order to determine who gets the extremely valuable school-based aid. These include scholarships that can go a lot further in covering your education than any federal award, but you may not be considered as eligible for them because you have money in a savings account.

It is important that financial assistance money go where it is most needed, but can’t that be assessed based on income? Is there any real reason to short-change someone who makes sacrifices and manages their budget in order to tuck a little money away for the future?

It wouldn’t hurt the federal government to take another look at the situation and see if there’s a way to rearrange the formula so that responsible people aren’t punished for it. If they pave the way, it’s likely schools’ financial aid offices will follow.

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