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)
of the child's lower tax bracket. Some of the more important reasons
include the following:
- Child assets are assessed at a rate of 20%. Parent assets are
assessed on a bracketed system, with a top rate of 5.64%. This
represents a difference in financial aid eligibility equal to 14.46%
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
as well as the value of small businesses owned and controlled by the
family (see small business exclusion).
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.