Account Ownership: In Whose Name to Save?

The financial aid formulas used by the federal government and the schools assess a portion of the family's assets when computing eligibility for financial aid. Under current financial aid formulas, there are significant benefits to saving the money in the parents name, despite the (meager) tax savings of the child's lower tax bracket. Some of the more important reasons include the following:

• Child assets are assessed at a rate of 35%. Parent assets are assessed on a bracketted system, with a top rate of 5.64%. This represents a difference in financial aid eligibility equal to 29.46% of the asset. These rates are assessed on the total value of the asset, including both principal and accumulated interest. In contrast, the tax savings due to the child's lower tax bracket is typically 13%, and then only on the earnings, not on the principal.

• Many parent assets are sheltered from the need analysis process. The need analysis formulas include an asset protection allowance based on the age of the older parent which shelters a portion of the family's investments. For the typical parents of college age children (age 45), this asset protection allowance amounts to approximately $45,000. In addition, money in qualified retirement plans, such as an IRA or 401(k), is disregarded by the need analysis formulas. Also, the Federal formula (but not the formulas used by many schools) ignores the value of the family's primary residence. There are no asset protection allowances for money in the child's name.

• Money in the child's name is legally the property of the child, so the child could spend it on whatever they want when the reach the age of majority. If the parents set up a trust to restrict the use of the money to educational expenses, it can negatively impact need assessments, since the full remaining value of the trust gets counted as a child asset each year.

Thus using the Uniform Gift to Minors Act to transfer money into the child's name is generally a mistake for most families. It is almost always better to save for college in the parents name.

Financial Aid Impact of Savings Vehicles

The following table lists the current financial aid treatment of the most common savings vehicles. For the purpose of assessing the impact on financial aid eligibility, we assume that the beneficiary is the child and the account owner is the parent (except where specified otherwise). Generally speaking, if the account owner has the ability to change the beneficiary at any time, the savings are treated as an asset of the account owner, not the beneficiary.

Savings Vehicle	Financial Aid Treatment	Comments
Coverdell Education Savings Account (formerly Education IRA)	asset of beneficiary (high impact)	If the child is the beneficiary, it counts as a child asset. If a parent is the beneficiary, it counts as a parent asset.
Section 529 College Savings Plan	asset of account owner (low impact)
Section 529 Prepaid Tuition Plan	omitted from FAFSA, but treated as a resource (very high impact)	Financial aid treatment may change to "asset of account owner" during the next reauthorization of the Higher Education Act of 1965
UGMA/UTMA Custodial Account	asset of beneficiary (high impact)
Series I and EE Savings Bonds	asset of registered owner (low impact)	A savings bond registered in the parent's name counts as a parent asset (low impact). A bond registered in the child's name as a single or co-owner counts as a child asset (high impact). If the bond was registered in the child's name, but parent's (owner's) funds were used to purchase the bond, the parent may change the beneficiary.
Regular Taxable Investments	asset of account owner (low impact if owned by parent, high impact if owned by student)
Variable Life Insurance	not reported on FAFSA (low impact)	Generally, the cash value of life insurance and assets in retirement plans are not reported on the FAFSA.
Traditional IRA	asset value not reported on FAFSA (low impact)	Withdrawal will count as taxable income, affecting next year's financial aid. Current year taxpayer contributions to IRAs, SEP, SIMPLE, Keogh, 401(k), 403(b) and other retirement plans are reported as untaxed income on the FAFSA.
Roth IRA	asset value not reported on FAFSA (low impact)	If Roth IRA owner hasn't been invested for five years, withdrawal will count as taxable income, affecting next year's financial aid.
401(k)	asset value not reported on FAFSA (low impact)	Withdrawal counts as taxable income, affecting next year's financial aid. If you borrow from the 401(k) instead of withdrawing funds, amount received does not count as income.
2503(c) Minor's Trust	asset of beneficiary (high impact)	If trust restrictions prevent liquidation, trust will continue as an asset in subsequent years, continuing to hurt need-based financial aid eligibility.
Other Trust Funds	asset of beneficiary (high impact)	Generally speaking, voluntary restrictions on uses of the trust will backfire, hurting financial aid eligibility. Only court-ordered involuntary trusts, such as those established to pay future medical expenses, are omitted from the FAFSA. All other trusts will generally count as an asset of the beneficiary. If the trust assigns ownership of the income to one party and the principal to another, you may need to do a net present value calculation to determine the value of the asset. If ownership of the trust is contested and the trust is frozen, it is not reported on the FAFSA. Please see the trust fund page for more information on the financial aid treatment of trusts.

Note that Congress may decide in the future to change the treatment of assets in the Federal Need Analysis Methodology to stop distinguishing between student and parent assets, replacing it with a uniform treatment of family assets. Such a change was proposed during the previous Reauthorization of the Higher Education Act but was not ultimately passed. Support for such a change, however, will be stronger during the next Reauthorization.

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For information or additional news, contact the editor at ygaa@pacbell.net