It’s no secret -- the cost of college is staggering and still on the rise. So, it makes sense, if you’re able, to squirrel some money away for your child’s education. Doing this reduces their student loan debt burden and sets them up for future financial success. However, did you know that it may not be prudent to put the college savings account in your kid’s name?
How Financial Aid Awards are Determined
But, before we get into why, it’s important to understand how your student’s financial aid award eligibility gets determined. Your child’s school of choice will subtract your expected family contribution (EFC) from the institution’s cost of attendance. The remaining balance, less any financial assistance already received, is your child’s financial need. Financial aid award packages are based off of this need.
Your EFC is calculated based on a formula established by the federal government. The formula takes into account the following information that you report on the Free Application for Student Aid (FAFSA):
- Income (yours and your student’s)
- Assets (yours and your student’s)
- Family size
- How many people in the family will be attending college in the same year
So, Who Should Own the College Savings Account?
Arguments for You
While the EFC considers the assets of both you and your child, your child’s assets are more heavily weighted. That means that their assets lessen their financial aid eligibility more than yours do. So, if the college savings account is in their name, it can ultimately reduce their financial aid package. In addition, when your EFC is calculated, some of your assets, such as money saved in a qualified retirement account, are exempt from consideration. None of your child’s assets are exempted. Finally, your child could use funds from an account in their name for any purpose once they become a legal adult. That could potentially mean years of diligent savings going to non-educational expenses.
Arguments for Your Kid
Of course, nothing in life is black and white. So, depending on your family’s circumstances, it could make sense to put the college savings account in your child’s name. For one, if they take some ownership in paying for college, they may put more effort into their studies. In addition, if you and your child join forces and both save for their higher education, the available pool of funds can grow bigger. Finally, even though assets in their name have more of an impact on their financial aid eligibility, it’s possible that their aid package will be comprised of primarily loans. If your family’s financial situation is such that your child wouldn’t qualify for need-based scholarships and grants anyway, it’s a smart move to save as much cash as possible. That will reduce the amount of loans that your child has to take out.
Pro Tip: Did you know that a 529 account is considered a parental asset, even if it’s in the student’s name?
Click here to learn more about the EFC formula. The document contains useful definitions, important rules, and worksheets for you to calculate your EFC at home.
You can also get a financial aid estimate for your student by using the FAFSA4caster. Simply fill in the required information (which is similar to the actual FAFSA) to get a ballpark idea of where you stand.
Determining whether to put the college savings account in your name or your child’s name is a nuanced decision. It’s important to understand your family’s financial situation and all of the savings vehicle options available to you. Since 529 plan rules vary by state, and financial aid package formulas vary by school, you’re encouraged to speak with a qualified financial professional and your student’s financial aid department for further guidance.
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