Fun Facts About College Financial Aid
Here’s a little-known secret for parents planning to send their children to college in the future: Some of the tax-saving moves you make now could hurt your student’s chances for getting financial aid later.
It’s because of the way the financial aid system treats different assets. Retirement plans and IRAs don’t count for college aid purposes under the federal government-mandated formula. You’re not expected to break into these accounts to pay for tuition.
So don’t assume you’re not eligible for assistance. With the high cost of college today, many schools now have programs available to relatively well-off families if they meet certain qualifications. For example, your child might be able to get a “merit award” based on high standardized test scores and superior grades.
One Smart Strategy
If you expect to apply for financial aid, don’t hold back placing money in your retirement plan in order to put away savings in a college account in your child’s name.
Contributions to retirement accounts are usually tax-deductible, and the earnings are tax-deferred until withdrawn. On top of these tax breaks, your family may also become eligible for more financial aid.
Remember that you can usually tap retirement accounts for college money. Many 401(k) plans allow loans to be taken. And you can generally withdraw a limited amount from your IRAs penalty-free to pay higher education costs for yourself, your children and grandchildren.
Note: Private colleges may use different formulas to calculate financial aid.
Another Key Point
Under the federal college aid formula, 20% of the assets in your child’s name are treated as being used for college costs. But the government-mandated formula expects only about 5.6% of the money in the parent’s name to be spent on college. So, you’re better off keeping accounts in your own name — especially during the last two years of high school, which is generally when you’ll be asked to start providing tax returns.
Preparing a Personal Financial Statement – A Snapshot of Your Financial Net Worth
Understanding your financial health is important as you navigate such life decisions as applying for credit for a loan or mortgage or as you undertake retirement and estate planning.
529 College Savings Plans Are Worth a Close Look
Sec. 529 plans include both prepaid tuition programs and college savings plans. Here are some of the more significant benefits of these plans.