While there’s a modicum of truth in this, the aid formulas really penalize you for not saving. Here’s why: Income is the biggest factor in every aid formula, and the aid formulas count more of your income than you’re likely to have available on an annual basis. Why? Because they assume that your income has been fairly consistent and linear for the years leading up to college, so you’ve been able to save on an ongoing basis.

Here’s a quick summary of the FAFSA’s Expected Family Contribution (EFC) calculation:

Up to 47% of your income above certain specific allowances is considered available to pay for college. Allowances might eat up half of your income, leaving up to 47% of the other half available for college.

How does that all play out? Let’s say you’re a family of 4 with household income of $100,000 and two students in college. Based on the formulas, your Available Income (what the FAFSA says you could spend for college) would be around $54,000.

Available Income is then assessed at various rates—much like tax brackets—up to a maximum rate of 47%. The average assessment rate for a household with $54,000 of available income is 35%, which translates to $18,900 available to pay for college. Each year. For four years. Obviously a family of four making $100,000 with two kids in college does not have $19,000 extra lying around each year. How can anyone possibly think this family could come up with that kind of money? They’re assuming you’ve been saving.

But wait—if they’ve been saving, then the formula is going to take that, too, right? Well sort of, and only some of it.

Just like with income, there is an “asset protection allowance.” If you have assets above the asset protection allowance, 12% of those are considered available to pay for college. The asset protection allowance depends on the age of the oldest parent, but the assessment rate is fixed. That 12% of assets figure is added to income and then assessed at the highest marginal rate (usually 47%) for the family’s income. So your savings are assessed at a maximum rate of 5.64% (12% x 47%), and only if they exceed the asset protection allowance.

What does that look like? Let’s assume our family of four, above, also has $50,000 in 529 plans, and based on the parents’ ages, the Asset Protection Allowance is $30,000.

                             $50,000             Assets in 529 plan

                           -$30,000             Asset protection allowance

                          =$20,000             Available assets

That $20,000 is multiplied by 12% (the parental asset assessment rate) to get $2,400. That amount is assessed at the highest income assessment rate (typically 47%) to get an amount available for pay for college, in this case 47% x $2,400 = $1,128.

So yes, your assets will be added into the calculation, but only a small fraction of them. In the above example, $100,000 of income generated an EFC of $18,900. $50,000 of assets only increased the EFC by $1,128. Looking at it another way, $1,000 in incremental income translates to $470 available to pay for college, but $1,000 in incremental assets is only another $56.50 available.

We rate “The formulas penalize you for saving” MYTH. But flip it around and it’s true: The formulas definitely penalize you for NOT saving.