Don’t Save in Student’s Name
Submitted by Larry Frank Sr. on Mon, 07/08/2013 - 12:00pm
Many times parents save for their children’s education in the child’s name
to save on taxes, but doing so could make it hard to get student aid. In
many cases, the taxes they save pales in comparison to the aid they give
up due to financial aid rules. There are better ways to pay for your
Many times parents save in the child’s name to save on taxes without
realizing the taxes saved may be less than the aid they give up due to
financial aid rules.
Why? Because money in the student’s name counts almost four times as
much against getting aid as compared to money in the parent’s name.
Thus, any money in the child’s name reduces the financial aid they may
receive. It is not the investment that is at issue, the very same
investment could be inside each option, the problem is how the
account is titled – that is, who owns it. The answer really depends
on your future financial situation instead of your financial situation right
now because all those variables only matter January 1st of each year the
student will be in college. There is an interaction between the tax
impact on the one hand, and the financial aid impact on the other.
Parents often title college savings, such 529 accounts, in the beneficiary’s
name because minors pay a lower tax rate and usually have little income
if any. But the name on the account changes how the estimated family
contribution (EFC) is calculated. The EFC is the amount of costs the
family covers, based on its financial ability and other factors. The level of
aid the student is eligible for is the difference between the cost of
admission and the EFC.
In general, the less the student has, the greater the financial aid. The
federal and state governments, the college and non-profits all rely on the
same calculation, so it’s best to keep the EFC low. Money in the student’s
name counts much more against getting aid than money in the parent’s
According to FinAid, if college savings are titled to the child, they are
assessed at a 20% rate. If the parents own it, it counts toward the EFC at
a top rate of 5.64%. Thus, any money in the child’s name reduces the
financial aid almost four times more than the same account in the
parents’ name. This more than offsets the savings from the child’s lower
tax rate. It is not the investment choice that matters. The problem is how
the account is titled.
If you want to ensure college may be paid for in part or in full, the best
course of action is to save for it rather than rely on aid for all education
expenses. Assets including college savings enlarge the EFC, but that’s
no reason not to save. Chances are that the student can’t just rely on aid
for all education expenses. If you save for education, you have plenty of
options with different advantages.
For a tax-deferred or tax-free option, you can invest in a 529 plan or
Coverdell ESA. Both options lower your state taxes, shrink your estate,
give you tax-deferred growth and allow you to control the underlying
investments. Coverdell contributions are limited to $2,000 per year, and
only families making less than $220,000 per year. A married couple can
contribute $28,000 into a 529 plan yearly.
Another option is to give the child an UTMA (Uniform Transfer to Minors
Act) account, a custodial account in the child’s name that must be
spent in his or her interest. An UTMA becomes the child’s money when
they become of age, and before that, it is taxed at the minor’s rate. But
remember that these impair the student’s eligibility for aid.
You can get more granular information about this from the Federal
Student Aid website. The FAFSA4casterestimates your student aid
award and the Consumer Financial Protection Bureau’s online tool helps
compare financial aid offers and costs. You can also seek out an advisor
with experience and up-to-date knowledge of the tax and financial aid
tradeoffs of saving for college to make sure that you take the best
Follow AdviceIQ on Twitter at @adviceiq.
Larry R. Frank Sr., CFP, is a Registered Investment Adviser (California)
in Roseville, Calif. He is the author of the book, Wealth Odyssey. He has
an MBA with a finance concentration and B.S. cum laude in physics with
which he views the world of money dynamically. He has peer-reviewed
research published in the Journal of Financial
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