My daughter is attending community college for general ed and will be transferring in fall 2017 to a university. Do you know how the FAFSA works when it looks at the Student's financial assets and the Parent's financial assets? She'll need to get loans, I want to maximize her chances of being able to get a Federal loan. We're working at building her credit worthiness. She works and has over $10K in savings now, which will double by the time she's ready to transfer, and I would like for her to be able to keep that money for the future, in case she needs it after college, before she finds a job. What can we do with that money now, over the next year, and over the 2 years after that when she's at the University.

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Congratulations on your daughter's acceptance into college.  This is a great achievement and you must be very proud.  This is a wonderful opportunity for her and at the same time, a confusing one for  parents navigating the many different ways to pay this upcoming bill.  For your question, I will limit my focus on the federal loans/aid as the non-federal system is different. 


The key to understanding FAFSA is to understand "Expected Family Contribution" or EFC. Let's consider this example.  If the cost of your daughter's college is $20,000 and your EFC is $4,000, then you could qualify for up to $16,000 in need based aid such as a subsidized federal loan.  However, this does not guarantee you will get that much.  The EFC calculation is complex, but overall, the parent is expected to contribute up to 5.64% of their assets towards college and the students is expected to contribute 20% of their assets.


Below are some highlights on which parental assets are included in the EFC calculation in addition to your income.  It is important to understand that each item can be treated differently as to what percentage is applied towards EFC.  For the complete list, please refer to the FAFSA website. 

1) Checking, savings

2) Investment accounts (401(k) and Roth/IRA accounts are not included but withdrawals from these accounts are treated as income)

3) Dividends and capital gains reported on a parent's Form 1040 are counted as parental income

4) Parent and dependent-student owner 529 accounts are generally considered a parental asset.


The good news is that the EFC calculation grants you certain "deductions" for asset protection allowance and education savings, which reduces your EFC.  Basically, the lower the EFC, the better for you.


When it comes to getting aid, what you have is what you have.  There is no way to "shield" your daughter's assets from counting towards EFC but that does not mean she must spend her funds, they only go into the calculation of how much aid you should qualify for.  Also, if she will use her savings in a few years, place those funds in a nice safe place like her USAA savings account.  If friends and family are planning to give your daughter money, they could hold off until after graduation to not affect EFC.  I wish your daughter the best of luck throughout her college years.