As
parents prepare their children to be responsible adults after high
school, many create savings account in their children’s name. Sometimes
those accounts can accumulate large sums of money over time or are used
as a vehicle for college savings. Having a child learn to save money at
an early age and saving for college seems perfectly logical and indeed
both concepts are. However, what most parents don’t understand is that
significant savings in a child’s name is often actually a huge mistake
when it comes to receiving financial aid.
I should note that if you are absolutely certain your family will not
qualify for financial aid there are some beneficial loopholes that can
be exploited by putting money in a child’s name. Those can quickly be
outweighed though if you do qualify for aid. The reason behind all this
is due to the FAFSA. Remember, the FAFSA is the Free Application for
Federal Student Aid and is essentially the clearinghouse for financial
aid for all colleges and universities. In the FAFSA formula, a parent’s
assets will be assessed up to 5.65%. A child’s, however, will be assessed
at 20%.
So
let’s say you are lucky enough to have squirreled away $25000 for your
child’s college by the time they graduate from high school. If that money was
in a parent’s name, you would be expected to contribute 5.65% or
$1,412.50 towards the first year of college. However, if that same
$25000 were in the child’s name, it would be expected that you
contribute 20% or $5000 towards the first year. That difference could
have been made up in grants, scholarships, or subsidized loans, if only
the money were in the parent's name.
It
should be said that when we are talking about assets here we might be
talking about cash, bank accounts, CDs, savings bonds, stocks, mutual
funds, trusts, even real estate. Any of these things, and some others, that
are listed in the child’s name will need to be listed as an asset of the
child on the FAFSA. It is also worth noting that money in a 529 plan or
state-sponsored pre-paid college plan are treated as parent assets even
if the child is listed as a beneficiary.
Therefore,
both of those are probably better vehicles for saving for college than
others, though both tie the money to college expenditures. Steep
penalties can be imposed if funds are withdrawn for expenditures that
are not approved by the established guidelines of those plans. Keeping
savings in the parents’ name also keeps control over the money with the
parent. If your child enters a dark period in their teenage years or
after high school, you won’t have to worry about that money going to
waste on purchases you would never approve of.
The
financial aid process can be extraordinarily complicated and if you are
serious about saving for college you should speak with a certified
financial advisor who specializes in college savings. I am not a
financial advisor but I do see a thin line between teaching your child
about how to save and getting the most bang for your buck within your
college savings. My personal opinion is that it is probably best not to
put all your eggs in one basket and keep the money you do use in your
child’s name to teach them how to save on the small side. It’s probably a
good idea to make sure generous family members like grandparents
understand this concept as well.
