Children's Savings Affects College Aid

I love your column. I have a question about children's savings and how it affects their ability to get financial aid for college. I know that you can teach children to save or invest through different vehicles, such as a savings account, stocks or IRAs. But if they have saved money, what's the impact on their financial-aid application?

When schools calculate how much a family can afford to pay toward college bills, assets held by a child are hit harder than assets held by a parent. Under the federal financial-aid formula, children are expected to contribute 20% of assets held in their name, whereas parents have to contribute no more than 5.6% of their assets.

So if you expect to qualify for financial assistance, it's better to hold the bulk of your assets in your name rather than your child's. But that doesn't mean your kids shouldn't save or invest. Don't become so focused on financial aid that you lose sight of teaching your kids the value of thrift and having them help pay for their own college expenses.

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Besides, when it comes to money saved by a child, the amounts will probably be small. Like all retirement assets, money in a child's IRA isn't included in federal aid forumulas. And if kids spend down their assets in the early years of college, they could qualify for aid later.

Sensible birthday parties

I agree with you so much regarding the outrageous things parents do for their children's birthday parties. When my oldest child, now 16, was younger, I always threw creative and economical birthday parties, and the guests raved about them afterward.

The cable show about lavish 16th-birthday parties is a prime example of how parents go overboard all in the name of ... love? What do these children have to look forward to for their weddings?

For my two younger children (28 months and 16 months), I have kept birthday celebrations to immediate family and a couple of family friends, and have limited it to cake and gifts. The children won't remember these parties, and the money would be better spent (or saved) elsewhere.

I have nothing to prove to anyone, and don't feel I need to keep up with the Joneses.

Updated July 2007