QUESTION OF THE WEEK - March 19

College Planning Question of the Week
March 19, 2010

In an effort to help parents and students to accomplish their college planning and financing goals, we decided it might be helpful if we offer a "Question of the Week".

Answer to Question of the Week

How do my children's assets, such as 529 plans, custodial accounts, and savings bonds affect the amount of financial aid they can receive?

First of all, 529 Plans are the asset of the grantor, normally the parents, not the beneficiary of the plan.  Other assets of the children such as UGMA or UTMA accounts, savings bonds, savings accounts, etc. are assessed at 20%.  This means that if your child has $10,000 in assets, the federal financial aid formulas will reduce your financial need by $2,000 meaning you will have to pay $2,000 more out of your pocket. This number is recalculated every year.

On the other hand, parent assets are assessed at 5.6% after deduction of your protected assets which is a formula based on the oldest parent's age.  Typically, it is about $50,000.  So, if a parent has $60,000 in assets (incuding 529 plans), the federal financial aid formulas will reduce your financial need by $560 on the extra $10,000, not $2,000!

Note that all 529 plans are pulled into the parent's formula including other 529 plans for siblings who are benficiaries.  Also, the federal formula is calculated from the FAFSA. Some private schools use the institutional formula which may or may not include these assets at different rates.

Conclusion:  Try to title assets in your name, not your children's. However, if you already have UGMA or UTMA accounts for your child, you may cause a tax event if you liquidate.  Contact a financial professional before restructuring your assets.

To continue the discussion, please enter your questions and comments by clicking on the "Comment" link below.

QUESTION OF THE WEEK - March 5

College Planning Question of the Week

March 5, 2010 - Inaugural Issue

In an effort to help parents and students to accomplish their college planning and financing goals, we decided it might be helpful if we offer a "Question of the Week".

Here's how it will work.

We will submit one to three questions each week based on the feedback from your blog and e-mail comments. On Monday, we will explore the answers and discussion on this blog.

To celebrate the first of the "College Planning Question of the Week", we offer 5 questions for your consideration and our answers. We invite you to contibute your comments and questions at the end of this post.

Do the following activities raise or lower your Expected Family Contribution (EFC)?

1) We own rental properties in our own names.
Rental properties titled as a personal property, i.e. in your own names, will increase your EFC by the amount of equity in the property assets. For example, assume you own a home with a $100,000 market value which generates rental income.  Let's assume that there are no mortgages on the home.  Your EFC will be inflated by approximately $6,000 a year.  Over 4 years, that equates to $24,000 in out of pocket costs!

2) We have doubled our 529 contributions in the last few years because of market losses.
529 plans are considered a parent asset and are included in the EFC formula. By doubling up on contributions when you are in your base year, you will increase your EFC and reduce your financial need! 

3) Our savings are all in Bank CD's and short-term accounts.
All liquid assets, unless they are IRAs, are included in the EFC formula and decrease your financial need.

4) My brother-in-law suggested we take out a home equity loan and put the money in a Mutual Fund for college expenses.
By putting the proceeds into a mutual fund, which is a liquid asset, your EFC will increase.

5) Our neighbor said, "Let the kids borrow the money for college. I did. Let them do the same."
The cost of college today has more than doubled and in many cases tripled since you were in school. Your child is also limited on how much they can borrow in their own name.  With this strategy, by the time your child finishes their college education and begins a career, the monthly payments on school loans can be staggering.

Please post your comments and questions below.

If you wish to recieve our "question of the week" by e-mail each Friday, please click on "Contact Us" at the top of the page.