A large number of college students use some form of financial aid, be it grants, scholarships, or loans. Financial aid can have an impact on your planning for college costs. Likewise, your choice of college savings plans can have an effect on the amount of financial aid available.

Prospective students can reduce college costs through federal grants and college scholarships or by applying for a wide variety of privately offered scholarships. Go to the Federal Student Aid Information Center Web site (fafsa.ed.gov), or call 1-800-433-3243 and check programs offered by your state or your school.

Students also can defer college costs through student loans. There are college loan programs to fit almost any type of family financial situation. The interest payments on certain loans may be subsidized by the federal government while the student is in school, and many students or their families can deduct the student loan interest they pay from federal income taxes.

When you’re trying to calculate what your costs are likely to be, it’s beneficial to focus on the assets you already have and not to include any expectation of financial aid. That way you can minimize the risk of underestimating the amount you need to save for the future.

An EFC measures your family’s financial strength and is used to determine your eligibility for federal student aid during one school year. You receive an EFC based on information you provide on the Free Application for Federal Student Aid (FAFSA) (source: fafsa.ed.gov).

Calculating a true EFC is a valuable step in the financial aid process. An EFC assumes the following general guidelines:

  • 22% to 44% of the parents' adjusted gross income is deemed "available" to pay for college
  • Parents' assets: up to 5.6%, including 529 savings plans
  • Student's assets: 20%, including UGMA/UTMA accounts
  • Student's income: 50% of income in excess of total allowances

In general, assets in the parents’ name (such as 529 plan accounts or taxable accounts) may improve your chances of receiving aid, since a smaller percentage of their value is included in the EFC calculation. In contrast, a larger percentage of assets in a student’s name (such as UGMAs/UTMAs) are counted in the EFC calculation and as such could reduce your potential aid package.

However, parents need to weigh the impact on financial aid against other considerations, including the tax benefits of various choices and ownership issues.