Summary
This article describes some recent trends in the financing of higher education and several college savings options including the tax-favored 529 Plan and Coverdell Education Savings Account. It also discusses the federal financial aid policy and calculates the impact of saving with various vehicles on financial aid. The article finds that consistent with some previous estimates, assets under a student’s name will have a large impact on the financial aid eligibility because they are assessed at a 35 percent rate in the EFC calculation and there is no asset protection allowance for students. It also finds that the commonly referred-to 5.64 percent marginal rate for parental assets in the EFC calculation is overstated for the majority of families in that only families with substantially high incomes are subject to the maximum 5.64 percent rate for all assets above the asset protection allowance. These findings indicate that the impact of parental savings on student’s financial aid is likely to be much smaller than was previously estimated.
