This week’s “College Corner” tackles the topic of asset ownership and how it impacts your eligibility for financial aid. Most parents are advised to never save in a child’s name for fear of losing financial aid. Child savings vehicles usually include UTMA accounts or having a child owned 529 account. Does this strategy apply to you? Let’s take a deeper look and find out.
Is it always a bad to save in my child’s name for college?
Absolutely not! College planning is unique for each family and so too should be your planning strategy. You first need to determine your Expected Family Contribution or “EFC”. Your EFC is used to analyze a students’ need for financial aid using a simple formula that subtracts the student’s expected family contribution (EFC) from a college’s total cost of attendance (Cost of Attendance – EFC = Financial Need). If a student’s EFC is less than a college’s cost of attendance, then the student qualifies for need-based financial aid.
The EFC calculation takes into account the income and assets of the parents and students but generally speaking assets in a child’s name will account for a higher EFC and therefore potentially lower your “financial need”. Child owned 529 and Coverdell accounts are exceptions for FAFSA purposes as they are counted as “parent” assets and assessed friendlier for aid purposes.
If you determine that your child will qualify for need-based aid then it usually makes sense to spend down your child’s assets before they are included in any aid calculations. And based on the new “Prior-Prior” rule this will now have to occur more than two years prior to when applying for aid.
But what if you determine that your child will not qualify for any need-based aid, meaning that their EFC is greater than the cost of attendance? If that’s the case then it wouldn’t matter if your child had a million dollars of assets. At that point you need to shift gears in your planning strategy and focus on tax aid and merit aid.
Shifting income and/or appreciated assets to your child can allow them to take advantage of their personal exemption, standard deduction and the American Opportunity Tax Credit. This strategy alone could save you thousands of dollars in taxes. Each situation is unique so work with someone who is familiar with college planning and taxes.
Merit Aid is based on your child’s academic, athletic, music and other ability, not family finances. The great thing about merit aid is that it typically comes in the form of grants and scholarships and has nothing to do with your income or assets. The key is to find colleges where your child will be viewed favorably from an admissions standpoint. Since most colleges, especially the elite colleges, do not offer merit aid you’ll have to do your research to determine which ones do.
Financial aid is only one part of “college planning”. Start saving early and often in tax advantaged accounts such as 529 plans. As college approaches focus on college selection to determine where your child will fit in best from an cultural, financial aid and future employment perspective. Lastly don’t forget tax aid and how to best use your personal resources to pay your share of the cost.
This might sound comprehensive and it should be. Some private universities now cost nearly $70,000 and the average student is graduating with nearly $35,000 in student loans. You need to plan for what could be the biggest investment you ever make.
About College Corner: Our goal here is to help you develop your best college planning strategy by addressing the topics of tax planning, saving, financial aid optimization, college selection and personal finances. If you have a question, please send it our way.