personal finance | march 8, 2024
5 Important Things You Should Know About Financial Aid
Consider these points when developing a savings strategy for your child’s college education.
Key Insights
Trying to save for the full sticker price of your child’s four-year college education can be daunting.
Remember that most schools don’t meet 100% of a family’s financial need and that loans are often part of the financial aid package.
Don’t let the quest for financial aid eligibility deter you from saving. You don’t often hear about people who are unhappy that they saved too much.
Roger Young, CFP®
Thought Leadership Director
Parents of young children receive a lot of advice about saving for college. Trying to cover the full sticker price can be overwhelming—even for an in-state public school. For most people, it makes sense to estimate how much financial aid your family might be eligible for when developing a savings strategy. As you factor financial aid into the total savings you will need, consider these five points.
1. Colleges probably expect you to pay more than you think you can afford.
The government and most colleges award financial aid based on your FAFSA—the Free Application for Federal Student Aid. The information you provide on your FAFSA determines your Student Aid Index (SAI). The SAI depends on many factors, with the most important being your family’s income. If your SAI is less than a college’s cost of attendance, the difference is considered your “need.”
Starting with the 2024–2025 school year, the SAI replaces the previous metric, called the Expected Family Contribution (EFC). The new name is intended to convey that the number is a factor in determining financial aid, rather than the actual amount a family will be required to pay. There are several key changes from the EFC in the calculation of the SAI. Perhaps the largest change is that having a second student attending college at the same time would dramatically reduce the EFC for each student but would not affect the SAI at all. On the favorable side, cash support and amounts paid on behalf of a student (for example, from a grandparent) are no longer added to income. In addition, the calculation of income no longer adds back pretax contributions to workplace retirement plans such as 401(k) plans. Overall, the new FAFSA significantly simplifies preparation of the form, particularly for families that might qualify for Pell grants.
For example, based on the SAI formula, a hypothetical dual-income family of four earning $140,000 with $50,000 saved in a 529 college savings plan (or other nonretirement accounts) would have an SAI of around $24,000. (See “Estimated Student Aid Index for a Family of Four” and the appendices for more information). At a private college costing $60,000 per year, this family would have $36,000 of need. At an in-state public college with a $24,000 annual cost, their need would be zero. The SAI amount may surprise you and could be a higher portion of your annual income than you would expect.
Keep in mind that accumulating more savings doesn’t increase your SAI nearly as much as increasing your income. At most, only 5.64% of additional assets are added to the SAI. An increase in income, on the other hand, can raise your SAI by as much as 47%.
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Estimated Student Aid Index for a Family of Four, 2024–2025 School Year
Total value of parents’ cash and nonretirement investments ($) | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
Parents’ Adjusted Gross Income ($) | - | $25,000 | $50,000 | $75,000 | $100,000 | $125,000 | $150,000 | $175,000 | $200,000 | |
$60,000 | (495) | 265 | 1,025 | 1,785 | 2,545 | 3,305 | 4,124 | 4,974 | 5,935 | |
$80,000 | 3,042 | 3,892 | 4,775 | 5,745 | 6,797 | 7,917 | 9,178 | 10,487 | 11,997 | |
$100,000 | 7,806 | 9,106 | 10,490 | 12,000 | 13,510 | 15,020 | 16,530 | 18,040 | 19,550 | |
$120,000 | 14,527 | 16,037 | 17,547 | 19,057 | 20,567 | 22,077 | 23,587 | 25,097 | 26,607 | |
$140,000 | 21,140 | 22,650 | 24,160 | 25,670 | 27,180 | 28,690 | 30,200 | 31,710 | 33,220 | |
$160,000 | 27,753 | 29,263 | 30,773 | 32,283 | 33,793 | 35,303 | 36,813 | 38,323 | 39,833 | |
$180,000 | 34,366 | 35,876 | 37,386 | 38,896 | 40,406 | 41,916 | 43,426 | 44,936 | 46,446 | |
$200,000 | 40,979 | 42,489 | 43,999 | 45,509 | 47,019 | 48,529 | 50,039 | 51,549 | 53,059 | |
$220,000 | 47,442 | 48,952 | 50,462 | 51,972 | 53,482 | 54,992 | 56,502 | 58,012 | 59,522 | |
$240,000 | 53,867 | 55,377 | 56,887 | 58,397 | 59,907 | 64,417 | 62,927 | 64,437 | 65,947 | |
$260,000 | 60,251 | 61,761 | 63,271 | 64,781 | 66,291 | 67,8011 | 69,311 | 70,821 | 72,331 | |
$280,000 | 66,594 | 68,104 | 69,614 | 71,124 | 72,634 | 74,144 | 75,654 | 77,164 | 78,674 | |
$300,000 | 73,112 | 74,622 | 76,132 | 77,642 | 79,152 | 80,662 | 82,172 | 83,682 | 85,192 |
The table shows SAI based on 2022 family income on the left and certain assets at the top. Those assets can include cash, stocks, bonds, mutual funds, and other investments, as well as the value of real estate other than your primary home and any business ownership. It excludes retirement accounts (such as an IRA or 401(k)), but 529 college savings accounts are included. Assumptions that affect SAI: The student is a dependent, has assets equal to 2% of the parents’ assets, and has income below $8,800. The family has no non-work income or other assets for FAFSA purposes. The family uses the married filing jointly status and standard deduction for federal income tax.
Source: T. Rowe Price calculations based on the 2024–25 FAFSA® Pell Eligibility and SAI Guide (PDF).
See the Appendix (in Downloaded PDF) for additional estimates, including different family sizes and for single parents.
2. Colleges may not give you the amount of financial aid you need.
Fewer than 10% of four-year colleges meet 100% of their students’ demonstrated financial need, according to the College Board. Their data suggest that many meet less than 75% of financial need. Even then, the exact amount can vary widely from student to student. Be conservative in estimating how much need-based aid your family will receive.
3. Financial aid provided includes loans.
Your aid package is not necessarily “free money”—loans can represent a large part of your overall financial aid, especially for families with significant income. In fact, federal loans accounted for 25% of financial aid for undergraduates in 2022–2023, according to the College Board.1 So, even if a college offers financial aid equal to your need, your family could still ultimately have to pay more than your SAI. Saving more now can help you limit the number of loans you may need to take in the future.
4. Your child may not receive large merit or athletic scholarships.
Merit scholarship offers can be very hard to predict. Some colleges regularly give out scholarships as a form of discounting, while others don’t offer any. Meanwhile, athletic scholarships are primarily offered at Division I schools and generally don’t provide a full ride for most sports.
5. Rely on your numbers instead of hypothetical amounts.
There are tools available that can help you estimate your financial aid and the amount you may need to save each month. To get more specific with your estimates, check out the online net price calculator (NPC) provided by each college. Just enter your financial data (anonymously, if you wish), and you’ll receive an estimated financial aid package for that school. Results from the NPC can then inform your inputs into a savings calculator, such as the T. Rowe Price College Savings Planner.
If a calculator suggests what seems to be an unrealistic amount, don’t despair. Save what you can and work toward a plan that enables your child to graduate. And whatever you do, don’t let the quest for financial aid eligibility deter you from saving.
- Roger Young, CFP®, Thought Leadership Director
529 Plans Managed by T. Rowe Price
With more than 80 years of financial experience in varying market environments, T. Rowe Price is focused and committed to helping you choose the right path for one of the most important investment decisions families face today. Our 529 plans offer benefits such as:
- A variety of portfolios, including enrollment-based options as well as a range of fixed investment strategies
- Automatic monthly contributions
- Powerful online tools to help chart your family’s saving strategy
- College savings specialists who are standing by and ready to answer any questions that you may have
- The GoTuition® gifting portal, an online tool that makes it easy to ask friends and family to contribute to a child’s 529 plan
GoTuition and GoTuition design are trademarks of T. Rowe Price Group, Inc.
A 529 college savings plan’s disclosure document includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. You should review the 529 plan offered by your home state or your beneficiary’s home state and consider, before investing, any state tax or other state benefits, such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s 529 plan.
1Figure SA-3 in “Trends in College Pricing and Student Aid 2021”.
Important Information
This material is provided for general and educational purposes only and is not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not intended to suggest that any particular investment action is appropriate for you. Please consider your own circumstances before making an investment decision.
Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.
All investments are subject to market risk, including the possible loss of principal. The charts and tables are shown for illustrative purposes only.
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