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What are your thoughts on having a college savings account in my kids' names instead of in mine?

I heard an argument relating to financial aid dispersion saying that the funds would somehow have a negative impact being in the student's name, but aren't they using my (as the parent) income to determine financial aid? How could having the account in the student's name versus mine make a difference?

Apr 24, 2012 by Amos from Yakima, WA in  |  Flag
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7 votes

There may be a few possible drawbacks; you'll have to make that determination. (1) At age 21, the child controls the funds, so it's possible the child could skip college and use the funds for other purposes - buy a car, etc. At any rate, they'll be out of your control; (2) financial aid could be jeopardized since the formulas used reduce aid availability substantially more for each dollar the child has in assets compared to the parent's assets. Also, (3) there may be some issues regarding the so-called 'kiddie tax' - you may want to visit with your CPA on that one.

Comment   |  Flag   |  Apr 24, 2012 from Moorpark, CA

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5 votes

Hello Amos,

This is a really tough area and there are pros and cons to both arguments.

Education IRA's are tax free for education - but limit the amounts that you can put in quite a bit.

529 plans are also tax free for eduation - but are quite often laden with high fees which greatly reduce returns. Additionally 529 plans count heavily against the student on the FAFSA form (Free Application for Federal Student Aid) and are essentially expected to be spent down to fund college.

UTMA or UGMA accounts - accounts where you or another person are the custodian (trustee) for the account - but the assets are legally the childs - and then revert to the child's name upon reaching the age of majority - also count heavily against the student on the FAFSA form and will count as a asset available for funding college when it comes to determining financial aid.

Accounts held directly in the child's name also count heavily on the FAFSA. Oddly enough - so does the studen't income - which doesn't make a bit of sense to me because if a student earned money in an after-school job during high school, it is likely they would no longer have that job once they started college. However, student income counts heavily against the student when it comes to determining need-based financial aid.

The best way to know what counts and what doesn't - and what counts MORE and what counts LESS - is to check out the FAFSA itself. Here are links to websites where you can find the info you need. It is not easy - and the more information you have - the better armed you are:

www.FAFSA.gov - this is the Department of Education Website www.FAFSAOnline.com - this is a service of the Student Loan Network - you have to enter your information, but you can download a great comprehensive guide to filling out the FAFSA - what assets go on the FAFSA, and what does not.

I would also ask that you read the guide I uploaded to this site - it is a good place to start. It is called "Strategies for Funding College - and Not Just Saving For it." Here is the link to it:

http://www.brightscope.com/financial-planning/advice/guide/3193/Strategies-For-College-Funding-Not-Just-Saving-For-It/

Good luck with your college funding. It is a challenge. The more you know, the better off you'll be.

Jon Castle http://www.Wealthguards.com

Comment   |  Flag   |  Apr 24, 2012 from Jacksonville, FL

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5 votes

Amos, The system sees it this way. -The child is your dependent and therefore you are responsible for the childs financial obligations. - Whatever funds are in the students name will be consider available to support the cost incurred and then they look at your financial ability to pay for the cost of college. Financial aid looks at the childs assets and the parents financial ability to pay and then decides how much they will supplement you. However, you can stop claiming her/he as a dependent a year before you apply for aid and that will increase the probability of the child getting more aid because she will be viewed totaly on her/his own. Good luck, Dan

Comment   |  Flag   |  Apr 25, 2012 from Asbury Park, NJ

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I favor holding the assets in the parent's name in a 529 savings plan. This has multiple advantages: 1) retain control of assets after child turns 18 (in case they don't want to use for school) 2) parental assets counted at lower % toward expected family contribution in financial aid calcs 3) 529 plans grow tax free and withdrawals tax-free if used for qualified educational expenses negating any 'kiddie tax' motivations 4) your state may allow state tax deduction up to certain contribution amounts 5) REGARDLESS OF VEHICLE USED, BE AWARE OF SHORTER TIME HORIZON AND ADJUST INVESTMENTS ACCORDINGLY AS YOUR BABY APPROACHES LAUNCH DATE

Comment   |  Flag   |  Sep 05, 2012 from Western Springs, IL

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In my college financial planning practice, I come across this sort of question very often. Generally, funds held in the student's name are assessed at a greater rate than your funds. There's a bit of a loophole for 529 accounts owned by the parent with the child named as a beneficiary. (The legislation is technically silent on their treatment and need for disclosure). A better way to arrange this is to have the 529 account opened and owned by a relative naming the child as a beneficiary. There is no current requirement for listing assets of anyone who is not a parent of the child applying for aid. (Think of the grandparents here. Create a gift that can keep on giving).

Comment   |  Flag   |  Jun 27, 2012 from Amesbury, MA

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All the answers are great but beware of losing the forrest for the trees. The important issue is investing enough and in the right strategy to have enough to meet your goals. Just make sure that you dont let the registration decision hold up implementation of your plan and regular investing.

Comment   |  Flag   |  Sep 08, 2012 from Port Washington, NY

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