Carrie Schwab Pomerantz

Dear Carrie: I've always encouraged my daughter to work to contribute to her college costs and she's managed to save quite a bit. Now I'm told that her savings may actually work against her in terms of financial aid. Why is this? Is there anything we can do? --A Reader

Dear Reader: I think it's great that your daughter is saving for college. To me, having kids contribute to college costs has a double benefit: It not only instills good savings habits, it also gives students a personal stake in their education.

However, when it comes to qualifying for federal financial aid, there's a bit of a catch-22. That's because student assets and income are treated differently than parent assets and income in financial aid formulas. As a result, it's true that your daughter's savings could reduce her financial aid eligibility.

Some of this may feel odd -- I agree -- but by paying attention to the rules, you protect yourself and your daughter from losing out on valuable benefits. Therefore, it's important to understand the rules before you fill out the Free Application for Federal Student Aid (FAFSA).

Understand the Percentages In determining federal financial aid, 20 percent of a student's assets are considered available for college expenses. Basically, this means that every $1,000 held in a student's name -- whether in a bank account, custodial account or trust fund -- reduces a potential financial aid award by $200.

On top of that, 50 percent of a student's income above a certain limit is considered available for college expenses. The limit for 2013-2014 is $6,130. Every dollar earned over the limit decreases a potential award by 50 cents. By contrast, only 5.64 percent of parents' assets are considered available for college expenses.

There's also an asset protection allowance (which increases as the parents age), so a certain percentage of assets won't be counted. Retirement accounts and the value of your primary residence are also excluded. Consider Where to Keep Future Savings All this points to the benefit of keeping college savings in your own name. You don't say how close to college your daughter is, but if it's still a couple of years down the road, it would be wise to think about where to put additional savings before the time comes to apply for financial aid.

A 529 College Savings Account is one of the best choices. If you open the account with your daughter as beneficiary, the assets are considered yours, not hers, so there's less impact on financial aid. And anyone can contribute to a 529. Even your daughter could add future savings to this account.

Carrie Schwab Pomerantz

Carrie Schwab Pomerantz is a Motley Fool contributor.

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