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.
-
Stock Market Today: Stocks End Higher in Whipsaw SessionThe main indexes were volatile Thursday with Nvidia earnings in focus.
-
Trump Picks Dr. Oz as Head of Medicare and MedicaidPresident-elect Donald Trump picked Dr. Mehmet Oz to lead the Centers for Medicare and Medicaid Services. Here's what to know about the former TV host.
-
529 Plans: A Powerful Way to Tackle Rising Education CostsContributions to 529 plans grow tax-free and are not taxed when they are used to pay for qualified educational expenses for the beneficiary.
-
Five Ways to Save on Vacation Rental PropertiesTravel Use these strategies to pay less for an apartment, condo or house when you travel.
-
How to Avoid Annoying Hotel Fees: Per Person, Parking and MoreTravel 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.
