Keep education money in parents' name



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


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.

Popular Questions


Two kids, two 529 plans?

Dear Big Bill,
While it's possible to maintain a 529 plan in just one child's name, even when you intend to send more than one child to college, I generally recommend that families open a separate 529 account for each child.

That's assuming there is no additional cost to maintaining multiple accounts. If your 529 plan charges an annual or quarterly account maintenance fee, check to see if you can avoid the fee by signing up for automatic contributions through payroll deduction or electronic funds transfer)

With a separate 529 plan for each child, it becomes easier for you to tailor the mix of stocks, bonds and stable-principal investments (e.g., stable value, guaranteed principal and money market funds) to the particular ages of your children. When your older child is nearing high school graduation, you may want to ratchet down the level of market risk in her 529 plan. At the same time, you could keep a more-aggressive asset allocation in your younger child's 529 plan, accepting more risk for a potentially higher return. Many 529 plans offer "age-based" investment options that automatically make these adjustments as the beneficiary ages.

Separate accounts for your children also offer more gift-tax leeway. Since your 529 contributions are treated as gifts from you to the account beneficiary, your $15,000 (in 2018) annual gift exclusion will go twice as far with two accounts -- one for each child -- than with just one account.

Financial aid is another reason to recommend maintaining separate accounts. You wouldn't want the investments reserved for your younger child's future college expenses to count against your older child's financial aid eligibility. Be warned: The rules here are rather murky, and the impact of a sibling's 529 account may depend on the college's own policies as well on as the type of aid -- federal or institutional -- being sought.

Finally, I believe that separate 529 accounts allow for better family bookkeeping. There will never be any doubt as to your intention to help send all of your children to college. You'll avoid the uncomfortable position of being asked to explain to a curious 8th-grader why account statements are showing up in the mail with only a brother or sister's name on them. And in the event of your death or divorce, no matter how unlikely, your legal representatives and other family members will have less reason to question your actions in setting up and funding the 529 plans.

Even with separate accounts, you'll continue to have the flexibility to shift the money around in the future. You simply need to make sure that whenever funds are withdrawn from the 529 plan to pay for college they are coming from an account in the name of the child incurring the costs. It's a simple matter to change the beneficiary designation among family members at any time, transfer 529 funds between different family members' accounts or split one 529 account into two. The ability to move assets around the family is a key advantage of 529 plans when comparing other college-savings alternatives, such as Uniform Transfers to Minors Act, or UTMA, accounts.

Original Post: 2005-10-13
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Coverdell ESA vs. 529 Plan: Which to choose? (Script)

The Coverdell ESA and the 529 plan are both excellent college savings vehicles because they are both tax-free when used for college. But many families face a choice: do they use a 529 plan for all of their child's college savings, or do they use a Coverdell for the maximum amount of $2,000 each year and put any any extra savings above $2,000 into a 529 plan? In spite of its low annual contribution cap, Coverdell's are now attracting quite a few families. There are two major reasons for that. One is that only the Coverdell allows you to self-direct your investments, just like you might self-direct the investments in your IRA. The other is that in addition to college expenses, Coverdells can be withdrawn tax-free to pay for a broad range of K-12 expenses, while 529 plans are limited to K-12 tuition. This feature is appreciated most in families planning to send their children to private grade schools, which may include additional costs such as room and board or uniforms. A 529 plan, on the other hand, does not impose age limits or income limits like the Coverdell does and so overall we see a lot more money going into 529 plans than into Coverdells. Plus many savers are happy with the investment choices offered by the 529 plans and don't necessarily want to self-direct their investments. And don’t forget this: your state may be giving you a state tax deduction for using a 529 plan, but there are no states offering a state tax deduction for investing with a Coverdell ESA.

Learn more about Coverdell ESAs.

Original post date 2013-07-15
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Top 529 Plan Withdrawal Tips. (Script)

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Top 529 Plan Withdrawal Tips. (Video)

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