Sep 23, 2023 Last Updated 21:18 PM EDT

Personal Finance

When it's fine to save in your child's name for their college education

Sep 02, 2015 02:46 AM EDT

Need-based college aid eligibility is the difference between the cost of a college education and the expected family contribution.

To determine the expected family contribution, the applicant should submit FAFSA, or the CSS Profile, or both. These aid forms include the students' and the parents' assets and income. But student assets are heavily counted at 20-25% on these aid forms, while the parents are only at 5.64-5%.

This is one of the major reasons why people opt not to save in the child's name for financial aid eligibility.

However, there are situations when saving in a child's name is a good idea for need-based college aid eligibility.

First is when the parent's income alone will disqualify the child from student aid. If the expected family contribution is so high that it would disqualify the student out of the need-based aid eligibility, then it wouldn't matter how much assets the student has.

The second situation where saving under your child's name wont hurt their student eligibility is if certain provisions under the federal methodology are met. This is especially for colleges that only use FAFSA.

Money saved for college in 529 plans and ESAs under the child's name for federal aid purposes has the same financial aid impact as putting the money under the parents' name.

Parents who earn $49,999 or below and can file a 1040 A or 1040EZ tax return are eligible for the simplified needs test of the federal aid formula, which exempts the assets of the student and the parents from being counted in the aid analysis.

Parents with an annual income of $24,000 or less can file for a 1040A or 1040EZ tax return to avail an automatic zero EFC.

Parents who are considered dislocated workers with an annual income below $49,999, the assets of the parents and the students will be exempted from the analysis.

Finally, look for one of the 23 colleges that use the consensus methodology to determine the EFC. The consensus methodology treats the parents' and students' assets as 5%.

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