It's never too early to start thinking about financial aid for college if you have children. In fact, the sooner you learn the process, the better. That's because how you save for your child's education can affect the aid the you receive.
According to the October issue of Kiplinger's Personal Finance magazine, you have to save strategically if you hope to qualify for financial aid. Here's what you need to know about how financial-aid formulas weigh assets in parents' names versus a child's name:
Parental assets. The federal financial-aid formula expects parents to contribute no more than 5.6% of their savings to college costs, and it keeps some assets out of the equation altogether. Private colleges use a different formula for calculating your contributions, but the percentage from savings is similarly small. In both cases, income has a far greater impact on financial-aid eligibility than parent-owned savings do. The federal financial-aid formula and most private colleges ignore assets in retirement accounts but consider distributions from the accounts as untaxed income in the year you withdraw them.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Child-owned assets. Child-owned assets are treated less gently. The federal formula assesses those accounts at 20%; the institutional formula, at 25%. For financial-aid purposes, you're better off saving in parent-owned accounts, which generally include 529 savings accounts, prepaid tuition accounts and Coverdells. UGMA and UTMA (custodial) accounts belong to the child, but you can transfer the money to a custodial 529 to qualify for the parents' lower assessment.
Grandparent-owned assets. The federal formula ignores assets in grandparent-owned 529 plans and cash-value life insurance but counts the distributions as income.
-
Home Energy Improvements Benefit Both Your Wallet and the EnvironmentHome energy improvements let you save on electricity bills while also reducing greenhouse gas emissions.
-
Free Coffee on National Cold Brew Day Saturday, April 20thJust in time for National Cold Brew Day, Dunkin', Pilot and Flying J Travel Centers, La Colombe and Dutch Bros. are offering up crave-worthy deals.
-
5 Ways to Save Money on Vacation Rental PropertiesTravel Use these strategies to pay less for an apartment, condo or house when you travel.
-
10 Annoying Hotel Fees and How to Avoid ThemTravel Here's how to avoid extra charges and make sure you don't get stuck paying for amenities that you don't use.
-
Are Student Loans Being Forgiven or Not?Student Loans The House and Senate voted to repeal President Biden’s student loan forgiveness plan, but does it even matter?
-
Are Scholarships Tax-Free?Education Scholarships are generally tax-free if certain IRS and other requirements are met.
-
Student Loan Forgiveness Blocked For Now Due to Court RulingsBiden's student loan debt forgiveness program is on hold until the U.S. Supreme Court weighs in.
-
529 Plan Contribution Deadlines529 Plans Many states have year-end deadlines for making 529 college savings plan contributions.
-
3 Key Ways You Can Help a Child or Grandchild Pay for Collegecollege Options such as 529 plans, education savings accounts and tax-free gifts can ensure you don’t carry a child’s student loan debt into your golden years.
-
Borrowers Over 50 With Student Loan DebtPaying for College Millions of borrowers 50 and older are struggling to repay loans for themselves and their children, some delaying retirement. There’s a trick, though, to help with repayment.
