Use A Health Savings Account (HSA) To Get Free Money For College

Want to save money for college? Use an HSA (Health Saving Account) to shield assets on your FAFSA application to get more free money for college. The college financial aid form doesn't recognize the money in your HSA as an asset!

Further, the HSA is tax-deductible, able to grow tax-free, and able to be withdrawn tax-free at any time (as a reimbursement for previously incurred medical expenses).

If you are lucky enough not to have any medical expenses, then the HSA will simply continue to grow in value.

Understanding The FAFSA And The HSA

The FAFSA is the Free Application for Federal Student Aid. It is a tool that schools use to evaluate students’ financial strength on a consistent set of metrics by calculating an Expected Family Contribution (EFC). It is based on the parents’ and student’s income and assets. Filing the FAFSA is an annual event for families of college students, starting in fall of senior year of high school.

To get the most amount of good financial aid, you want to get the lowest EFC amount possible. The difference between EFC and Cost of Attendance at a given college is your financial need. Starting in 2023, EFC will be referred to as Student Aid Index (SAI).

By keeping college savings dollars in the HSA, you are not penalized for saving money in the eyes of the financial aid calculations. It's the same concept as keeping college savings dollars in a Roth IRA, if you are eligible to contribute.

Why The HSA Is A Great Way To Save For College

Here are the two ways the HSA is a great way to save for college.

  1. Health Savings Accounts are counted as “retirement” assets, which are excluded from the parental asset calculations.
  2. Withdrawals from HSAs to reimburse previously incurred medical expenses are not included as income on the FAFSA.

In other words, this means the HSA is double FAFSA-blind. The FAFSA is unable to see the HSA as an asset. As a result, a family's Expected Family Contribution is lower, meaning the family will get more free money from the university and/or government.

On the other hand, withdrawals from a Roth IRA are counted as income. Additionally, the assets inside a 529 plan are counted in the FAFSA calculations, while assets in IRAs, 401ks and other retirement accounts are not.

Hence, a Roth IRA is not double FAFSA-blind. Only the HSA is. For more, see 529 plan or Roth IRA to pay for college.

HSA and 529 Impact On Receiving Good Financial Aid

Let’s run an example of a family applying for federal financial aid.

The family has a son, a paid-off home, $60,000 passive investment income and $1,400,000 in investments. The investments are broken out as $1,300,000 in a 401(k), $84,000 in an HSA, and $16,000 in a taxable brokerage account. This is an excellent combination to get good financial aid.

To get more good financial aid, you want as much of your investments in retirement accounts as possible because they don't count!

Their annual spending is $50,000 (all their after-tax investment income) and the parents are 53 years old when their child enters college.

Analyzing The Different Scenarios

Using the EFC Calculator from the College Board, we can run the numbers on two different scenarios.

Scenario 1: $84,000 in a Health Savings Account (aka contributing the maximum $7,000 per year for 18 years of the child’s life). As a result, the money in the Health Savings Account is not reported in this calculation.

Scenario 2: $84,000 in a 529 College Savings Plan. As a result, we come up with an Effective Family Contribution of $4,737 each year. EFC is based off assets X 5.64%.

By stashing the college savings in an HSA, we’re able to lower the Expected Family Contribution by $4,737 each year. Over the course of four years, that’s $18,950 in savings!

Below is a fascinating case study using the college calculator that highlights the importance of using an HSA to shield assets from FAFSA.

The below family has a healthy $250,000 household income and a whopping $3,000,000 in retirement assets in a 401(k), Roth IRA, and HSA. As a result, they get $29,250 a year in need-based scholarships!

Using an HSA to save money for college - FAFSA doesn't include HSA

Stay On Top Of Your HSA Accounts

Contributing to an HSA will help your family save on college expenses. HSA accounts are not included in the financial aid application. An HSA is one of the best ways to game the college financial aid system and get free money.

Make sure you keep both paper and digital records of all medical bills. Have a spreadsheet that lists the dates, healthcare provider, description of service, and amount paid.

If you don't have any medical issues, then the HSA will compound over time. The x-factor is not having medical issues!

There are lots of things that count as IRS-Qualified Medical and Dental Expenses. Prescription drugs, contact lenses and solution, dental treatments, doctor’s office visits/co-pays, eyeglasses, IVF, flu shots, laser eye surgery, orthodontics, pregnancy tests, special education for learning disabilities, speech therapy, and vasectomies all count toward using your HSA.

Hence, you might not have as much money leftover from an HSA to pay for college as you might thing. Make sure you use the HSA money by the time you're 65. If you don't, it gets treated like a traditional IRA and you can withdraw the money for any purpose without penalties.

Use An HSA To Save On College Expenses

The more you have in your HSA, the more you can save for college by getting more grants and scholarships. You want to shift as much assets to your tax-advantaged retirement accounts and HSAs as possible to get free college money.

I highly encourage you to plan for the future. The sooner you can plan ahead, the better you can manipulate your assets to look as poor on the FAFSA filing as possible.

HSA References From The Government

IRS Publication 969 HSA Rules

Filling Out the FAFSA with an HSA


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