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If you are concerned with maximizing your child’s financial
aid eligibility, consider moving her UGMA/UTMA money into
a 529 savings plan or prepaid tuition plan. You’ll benefit
from the recent changes made to the federal aid formula under
the Deficit Reduction Act of 2005 (signed into law by President
Bush on February 8, 2006).
Beginning July 1, 2006, UGMA/UTMA assets held within a 529
savings plan will no longer be included with other student-owned
assets in the formula for determining a family’s “expected
contribution” towards college costs. What used to count
against aid eligibility at the rate of 35 percent will now
be assessed at no more than 5.64 percent of value. The picture
brightens even more considerably for families using a state-sponsored
prepaid tuition plan or the private-college Independent 529
Plan. Instead of causing a dollar-for-dollar reduction in
federal aid eligibility, prepaid plans will now share the
same treatment as 529 savings plans.
Before these changes, some parents would attempt to convert
35-percent assets into 5.64-percent assets by transferring
their children’s UGMA/UTMA assets into 529-plan accounts
under their own names, and disregarding the specially-designated
“custodial” accounts made available in most 529
plans. This questionable practice will no longer enhance aid
eligibility. In fact, investments held in a parent-owned 529
account may receive LESS favorable treatment than investments
in a custodial 529 account. Presumably, all of your parent-owned
529 accounts will have to be reported on the financial aid
application of each of your children attending college, while
it’s possible that a custodial 529 account will only
have to be picked up for the particular child named on that
account.
Does this mean that even if your child does not already have
UGMA/UTMA money you should be establishing and making contributions
to a custodial 529 account in his or her name instead of to
your own 529 account? If you have more than one child to send
to college and intend to apply for need-based aid, the answer
could very well be “Yes.” However, this particular
issue will remain unsettled until additional guidance is provided
by the U.S. Department of Education discussing treatment of
custodial versus parent-owned 529 accounts in families with
more than one dependent child. There may also be some downsides
to placing funds into a custodial 529 account. That account
will be subject to special rules, including a restriction
on changing beneficiaries, and will transfer to your child’s
direct ownership when he or she reaches legal age (generally
18 or 21).
Here is another important issue that calls for some attention
from the U.S. Department of Education: The new law specifies
what the 529 account IS NOT (i.e. a student asset) but does
not state what it IS. It would be logical to assume that you
will have to treat both parent-owned and custodial 529 accounts
as parental assets subject to the maximum 5.64 percent assessment
rate.
If you decide to begin moving UGMA/UTMA assets into a 529
plan, remember that the 529 plan may only accept cash, and
that any investments will first have to be liquidated and
any gains or losses reported on the child’s income tax
returns. The triggering of gains can affect financial aid
eligibility since “base year” income is factored
into the aid formulas. Your alternative is to keep the UGMA/UTMA
assets outside the 529 plan, but perhaps look for ways to
legally “spend-down” the assets prior to filing
the FAFSA aid application. Even if you have UGMA/UTMA assets
to report on the FAFSA application, their impact will be lower
in the future: Beginning with the 2007-08 school year, the
assessment rate on student assets drops from 35 percent to
20 percent.
Joe’s
Blog
If the President gets his way, you’ll be sweeping your
529 funds into a new type of investment called a Lifetime
Savings Account.
Tutorial
Our “basics of 529” have been updated for changes
in the 2006 tax and financial aid laws.
Get
Started
Use these links to quickly and easily access the program enrollment
materials for any direct-sold 529 savings program. The best
part? When you use “Get Started,” we’ll
email to you our Savingforcollege.com Checklist for Selecting
a 529 Plan. Free!
Joe Hurley’s Q&A column on Bankrate.com:
Paying
off debt versus a 529 plan
Will
saving hurt chances for financial aid?
Using
Roth IRA to pay college expenses
Pros
and cons of “gifting” college money
Power-fund
a 529 plan via ‘5-year election’
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