When it's OK to save in a child's name

Despite common wisdom, there are situations in which putting money in student's account is sensible

Sep 21, 2014 @ 12:01 am

By Troy Onink

Need-based college aid eligibility is determined by the following formula: A college's cost of attendance - the expected family contribution = need-based aid eligibility.

The expected family contribution is determined by submitting one or both financial aid forms, the Free Application for Federal Student Aid or the College Scholarship Service Profile. Assets and income in both the student's and parents' names are counted on the aid forms, but student assets are counted as heavily (negatively for aid eligibility) as 20% and 25% on the FAFSA and CSS Profile, respectively, versus 5.64% and 5% for the parents. That's why the common wisdom is never to save in the child's name.

THREE EXCEPTIONS

Never say never, and here's why.

There are three situations when saving in a child's name does not hurt his or her eligibility for need-based college aid:

1. Parents' income disqualifies student from aid. The ex-pected family contribution is based on income and assets, and most parents can't adjust their income downward. If based on the parent's income alone, the student's EFC would be so high that it would throw the student out of eligibility. At that point, it doesn't matter how many assets either parents or students have, as students wouldn't qualify for aid even without any assets.

2. Three provisions under the federal methodology (colleges that use just the FAFSA). Under the federal need analysis formula, Section 529 and educational savings accounts owned by students are considered assets of the parent. Therefore, they get more favorable aid treatment than assets such as savings accounts, mutual funds, stocks and bonds.

So for federal aid purposes (for example, Pell grants and subsidized Stafford loans), money saved for college in 529 plans and ESAs in a child's name has the same financial aid impact as if it were saved in the parents' name.

The good news is that parents with household income of $49,999 or below who also can file a 1040A or 1040EZ tax return meet the criteria for the simplified needs test in the federal aid formula. Neither the student's nor the parents' assets will be counted in the aid analysis.

In fact, with recent changes made to simplify online filing of the FAFSA, filers (parent and student) may not even be presented with any asset questions if they meet certain criteria in previous questions. So the parents' and student's assets would simply be ignored in the formula.

In addition, under the federal aid formula, parents with annual incomes of $24,000 or less who are eligible to file a 1040A or 1040EZ tax return get an automatic zero EFC.

The dislocated-worker provision in the federal aid formula states that if a parent is a dislocated worker (according to the definition below) and the parent(s)' annual income is less than $49,999, the parents' and student's assets will not be taken into account.

DISLOCATED WORKERS

In general, a person may be considered a dislocated worker if he or she:

• Is receiving unemployment benefits because of a layoff or loss of a job and is unlikely to return to a previous occupation.

• Has been laid off or received a layoff notice from a job.

• Was self-employed but is now unemployed because of economic conditions or a natural disaster.

• Is a displaced homemaker — generally a person who previously provided unpaid services to the family (for example, a stay-at-home mom or dad) who is no longer supported by the spouse, is unemployed or underemployed, and is having trouble finding or upgrading employment.

A person who quits working generally is not considered a dislocated worker even if, for example, he or she is receiving unemployment benefits.

These provisions can be highly important for unemployed parents, single parents, widows and widowers who have a single family income and may potentially have a large amount of insurance proceeds in cash or investments.

Under these provisions, those large assets would not be counted against a student for aid purposes.

3. Consensus methodology colleges. Twenty-six colleges use the consensus methodology of calculating a student's expected family contribution.

Under this methodology, assets in parents' and student's names are both treated at 5%.

Troy Onink (troy.onink@stratagee.com) is the chief executive of Stratagee Corp., which provides college planning stategies.

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