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%.

Estimated Student Aid Index for a Family of Four, 2024–2025 School Year

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.

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.

View investment professional background on FINRA's BrokerCheck.

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