Keep education money in parents' name

Question

Dear Joe, I want to put money away for my two children for college. However, I do not want the money I have put away for them to affect their eligibility to get student loans. Should I put the money in my name or their name? Thank you. -- Matt

Answer

Dear Matt,

Unless Congress changes the rules, your children will be able to obtain federal student loans regardless of how much money you have set aside for college, or in whose name it is invested.

"Unsubsidized" Stafford loans are currently available to almost all dependent undergraduates in amounts up to $3,500 for first-year students, $4,500 for second-year students and $5,500 for each full academic year thereafter. Annual loan limits are higher for independent students, for students whose parents are turned down for a PLUS loan and for graduate students.

The interest rate on new Stafford loans is a fixed 6.8 percent. To apply for a Stafford loan, the student must first file the Free Application for Federal Student Aid, or FAFSA.

Where your college savings makes a difference is in determining your children's eligibility for "subsidized" Stafford loans. If the student can demonstrate financial need, based on information submitted with the FAFSA, the federal government will pay the interest on the loan while he or she is still in school, for a six-month grace period after graduation and for any approved period of deferment after that.

The annual loan limits and other characteristics of subsidized and unsubsidized Stafford loans are generally the same. Need-eligible students might also qualify for other federal, state and institutional aid programs including Pell grants, low-cost Perkins loans and school-based grants.

Assuming your children will be filing the FAFSA as dependent students, placing your college savings in your children's names can have a significant negative impact. Twenty percent of the value of those assets at the time of FAFSA filing is included in the expected family contribution, or EFC, and that determines how much need-based aid for which the student is eligible.

An important exception exists for assets in 529 plans and Coverdell education savings accounts owned by the student, or by a UGMA/UTMA custodian for the student, which under current law are completely excluded from the FAFSA.

While the exception for 529s and Coverdell ESAs may sound like a great opportunity to keep assets off the radar screen, Congress is considering legislation that would treat those accounts as parent assets beginning with the 2009-2010 school year. Parent assets are counted in determining EFC, but the assessment rate -- a maximum of 5.64 percent -- is low relative to student assets.

Another advantage with keeping investments in your own name has to do with keeping control of the money. Gifting it to your children means they will have complete ownership and discretion over the funds when they reach the age of majority, generally 18 or 21. Unless you are assured of significant income tax savings by saving in your child's name, you'll be better off keeping the money in your own name.