<p>I have saving approximately $40K for my daughter's education in 529 investments. We are applying to schools for merit money.</p>
<p>My financial advisor is strongly suggesting that I "cash in" all the 529 accounts so I do not have to report this to the colleges. He wants me to put it in indexed annuities so in effect it becomes retirement income. To do this requires me to pay the 10% penalty + taxes.</p>
<p>He tells me that if I don't I risk the school bypassing my daughter for merit money. If I don't I have to show this as assets belonging to my daughter.</p>
<p>Merit money is called Merit because it does not consider need. Kids with need can get FA + Merit but kids who cannot qualify for FA get Merit. I don't know what your advisor doesn't understand about Merit Money.</p>
<p>Having the money in your name instead of your D name will help you with need based FA. Some merit scholarships also have a need based component.</p>
<p>Thanks for the reply - the thinking of my advisor is as follows: If 2 kids are equally qualified for a merit scholarship, the schools will lean in the direction of the kid with the most need. This may not seem right or fair but is the reality of the situation. Hence his advise to move assests such as the 529 and texas tomorrow fund out of my daughter's name even I have to incur penalties, taxes, etc.</p>
<p>It sounds like your financial advisor is a little confused. 529 (assuming they are college savings plans and not prepaid tuition plans) are normally counted at the parent's rate of 5.65%. I am a college financial advisor, and I haven't recommended liquidating one of these accounts in five years. I don't think they're the best for saving, but they're not worth the problems at this point of liquidating them. Trading a 5.65% penalty for a 10% penalty doesn't make much sense.</p>
<p>Make sure you spend down this money first as it may qualify you for more help in the coming years.</p>
<p>Now if these 529's are in the student's name (very unusual but it does happen) then you will have a 35% penalty on that money. Trading penalties would then make sense.</p>
<p>Keep in mind as well, the annuities only work for the FAFSA standard. They will have no effect on the Profile standard. The only asset that works for both is cash value life insurance, and believe or not, there are ways to make this work very well.</p>
<p>Your advisors thinking behind it does make some sense, but the numbers seem a little off.</p>
<p>Can you clarify what the savings is currently in?</p>
<ol>
<li><p>Texas Tomorrow fund - $17,000 prepaid for 4 years of public school in Texas. My daughter wants to go to a private school, however. If she wanted to attend a public university, I would hold it for sure.</p></li>
<li><p>VCSP/Collegeamerica AMCAP Fund - 529C. I am the owner. The base is $20,000 with about $3,000 in appreciation.</p></li>
</ol>
<p>I'm not 100% clear on your comments about FAFSA standard versus Profile standard. I will need to do more research.</p>
<p>Leave the Collegeamerica fund alone. You won't get enough benefit out of moving it to do you any good.</p>
<p>The prepaid is another matter. If you daughter qualifies for FA, the prepaid will cut her off at the knees.</p>
<p>Assumptions:
A college wants to give you D a financial package of $5,000 per year.
The state distributes prepaid at $5,000 per year.</p>
<p>Standard procedure is to discount the financial award by the amount of money available to the student through the prepaid. Using the above assumptions, your daughter wouldn't get any money from the school until her Junior year. A combined loss of $17,000 in available aid. If that money were in a simple savings account, it would only cost you $960 per year. A combined loss of $3,840 in available aid.</p>
<p>This is why prepaids are just about the worst college plans going.</p>
<p>Keep the Collegeamerica and spend it down first. Dump the prepaid and look for a way to shelter it. The liquidation fees and penalties are normally minimal compared to what you may wind up losing.</p>
<p>You may want to estimate your FA before making changes as well. I recommend using the aid calculator at Collegeboard.com</p>
<p>Keep in mind, availability of aid has a tremendous amount to do with the generosity of the school, their financial track record.</p>
<p>As to FAFSA and Profile... There are two standards for determining FA, The FAFSA calculation and the CSS Profile calcualtion.</p>
<p>FAFSA is the most common and is used by all public colleges and the majority of private colleges.</p>
<p>CSS Profile is administered by the Collegeboard (same folks who administer the SAT) and is used by about 25%-30% of the private colleges.</p>