Advice iq don't save in student's name

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Student financial aid vs saving in student name

Student financial aid vs saving in student name

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  • 1. 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 children’s’ education. 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
  • 2. name counts much more against getting aid than money in the parent’s name. 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 possible route. 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 Planning. www.blog.BetterFinancialEducation.com. AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty. For instance, the rankings this week measure the number of clients whose income is between $250,000 and $500,000 with that advisor. AdviceIQ also vets ranked advisors so only those with pristine
  • 3. regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily. Topic: College Funding 529 Investments Trusts and Estates