CFP

Education Planning - Funding Strategies and Ownership of Assets

C. Funding strategies

  • Systematic saving
  • Paying from current income
  • Financial aid
  • Student work

D. Ownership of assets
A primary question facing parents saving for college expenses is whether accumulated assets should be owned in the names of the parents or the names of the children. Generally, unless a family is absolutely sure a child will not qualify for financial aid, it should save money in the parents' names, not the child's.

Although financial aid and Expected Family Contribution formulas have become more complicated in recent years, they still assume that the child will contribute a greater portion of his or her assets than parents to cover higher education expenses. This means placing assets in the child's name means he or she will qualify for less financial aid.

There may be tax benefits to placing assets in a student's name, but those benefits are often outweighed by the financial aid cost. Also, an expansion of the so-called kiddie tax on children up to age 18 has reduced the possible tax benefits. Under the kiddie tax, unearned income in excess of $2,000 received by somebody under age 18 is taxed at the parent's marginal tax rate, eliminating the benefit of shifting income from a parent to a child.

Under 2006 legislation, Section 529, "custodial accounts" owned by a dependent student are no longer treated as a student asset for purposes of federal financial aid.


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