Financial Aid and Investments For Education

Due to rising educational costs, all of us need to plan ahead when investing for education. Putting aside those dreams of an all-expenses-paid scholarship, most of us will pay for college through savings, investments and loans. However, financial aid may be available as well.

You may be of the mindset that financial aid is only available to low-income students. We're here to tell you dispel that myth. Unless you are Bill and Melinda Gates, you may have financial aid options that can help you cover educational costs. However, here's where things get tricky. Similar to a medicine that can make you well when taken on its own, but that makes you really ill when taken in conjunction with another medicine, using investments as a vehicle for education expenses must be monitored closely due to interactions with opportunities for financial aid. Read on to see what we mean.

The financial aid process. Starting with a bit of background on the financial aid process, when we talk about a student applying for financial aid, generally we are talking about federal financial aid. Financial aid from the government comes in various forms such as grants, loans, and work-study programs. To apply for financial aid, a student must fill out the Free Application for Federal Student Aid Form or FAFSA for short. The form itself and information about the form is available at the U.S. Department of Education website. Among other information, this form contains questions about the student's and the parents' income and assets. The application uses this information to determine your expected family contribution, which in turn determines whether the student is eligible for financial aid and, if so, in what amount. The FAFSA information also is often used to determine eligibility for financial aid from private colleges or universities, and for state financial aid purposes as well.

Tip Keep in mind, one of the factors taken into account when determining the amount, if any, of financial aid you qualify for is the cost of the school the student will be attending. So, for example, your income level may disqualify you for financial aid at the state university, but not for that expensive private college your daughter wants to attend.

Investments and your family contribution. The main point in regards to investments and financial aid is that, for purposes of calculating your expected family contribution, investments typically used for education are not all considered equally. For example, Coverdell Education Savings Accounts are considered to be the student's assets. Therefore, they are given more weight when calculating the expected family contribution toward education, resulting in less aid. On the other hand, college savings plans are considered assets that belong to the parents (or grandparents, or other donor, as the case may be). Therefore, college savings plans do not weigh in as heavily in the expected contribution calculation.

The ultimate irony is that the better any of your investments have done in moving you toward your college savings goal, the less chance you have of receiving financial aid. Does this mean you should put your investment dollars elsewhere and figure financial aid will take care of education costs? No, this isn't the way to go. Again, while seeing into the future would come in handy, we do have some other suggestions. To figure out your expected family contribution, visit the not-for-profit college board website. While there's no guarantee your income and assets will be the same when your child is ready to attend college, particularly if your child is very young or you're just starting out career-wise, you'll get some idea of how the financial aid process works. You can even adjust your responses for different scenarios to see varying results. Finally, because this area is so complex, you may want to consult with professionals that specialize in financial aid planning and college investments.

The necessity of saving and investing for education is a given. However, because costs are so high, there's no reason why you shouldn't take advantage of all the avenues open to you by choosing investment vehicles that may make it possible for you to receive financial aid as well.

© 2024 Wolters Kluwer. All Rights Reserved.