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Title: Can that stash hurt your AID? Author(s): Paul J. Lim Article Text: As if figuring out a practical savings strategy weren't difficult enough, parents also have to consider how their college nest egg will affect their offspring's eligibility for financial aid down the road. To determine eligibility for aid, the family must fill out the government's Free Application for Federal Student Aid, or FAFSA (story, Page 71). The form requires basic details about both the parents' and student's income and assets. "From a financial aid standpoint, anything in the child's name can be detrimental," says Joseph Hurley, founder of saving forcollege.com, a college finance website. That's because the government deems 5.6 percent of parents' assets fair game in paying college bills. But 35 percent of a student's assets are expected to go toward the bills. This is one reason why Coverdell education savings accounts have been overlooked by many parents seeking aid. Assets in those tax-advantaged accounts have been considered the student's. But now that has changed. New guidance. In a move that could have a significant impact on how working- and middle-class parents save for school, the Department of Education issued a memo earlier this year to the financial aid community clearly stating that Coverdell accounts, for purposes of financial aid, can be regarded as assets of the parent if the parent owns the account. "This now puts Coverdells on the same footing as 529s in terms of financial aid," says Bob Corcoran, vice president of college planning for Fidelity. The Education Department also clarified the financial aid treatment of 529 savings plans. Tax-deferred 529s are already considered the assets of the parent. But there was a concern that withdrawals from a 529 could be counted as the student's income, a negative when it comes to aid. But now, qualified distributions from 529s and Coverdells are not to be regarded as either parental or student income and "therefore do not reduce financial aid eligibility." This should put Coverdells and 529s high up on the list of preferred savings vehicles for parents who will be seeking financial aid. On the other hand, assets held in a traditional custodial account, like a Uniform Gifts to Minors Act account, are still considered the student's and therefore unfavorable when it comes to the aid calculation. Meanwhile, 529 prepaid tuition plans reduce aid eligibility dollar for dollar. |
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