I know my college buddies and I are getting older when they start asking me for advice on the best ways to pay for their kids’ future college educations. Here’s a tip I shared with them at our mini-reunion a few weeks ago: unless you want to hurt your eligibility for need-based financial aid, don’t put money in your kid’s name.
Full disclosure: I am not a financial planner, so please talk to one before you move money around based on what I say in this paragraph. But while I know there are some healthy tax advantages to a parent putting money in their kids’ names, there is also a terrible financial aid disadvantage to doing so. When a student applies to college, the federal formula for need-based financial aid evaluates the income and assets of both the parent and the student. Parents’ income is assessed at 47%, assets at up to 5.65%. But a student’s income is assessed at up to 50%, assets at (gulp) 20%.
That means that a parent who saved $50,000 to pay for college will be expected to use as much as $2825 of that money to pay for the first year of college. Had that money been put in the student’s name, the expected contribution would have increased to as much as $10,000.
If you’re looking for a smart way to save for college that will also yield some tax advantages, look into 529 plans. The student is named as the beneficiary, but the parent controls the money. More importantly, colleges treat 529 plans as parent—not student—assets.
I suppose it's a good thing that our conversations have matured since college, even if we did spend most of our mini-reunion enjoying beer, listening to Springsteen, and marveling at the degree to which Mike's air cymbal playing really adds something special to "Born to Run."