<p>Ive read in various places about the wisdom of using a students assets first for paying college expenses before using parental assets, in that the FAFSA methodology considers a much higher percentage of student assets as available for that years expenses as compared to assets held in the parents names. I have a few questions about our situation and Id appreciate any input to confirm that Im looking at this right (or to suggest any alternatives).</p>
<p>My son has a savings account that has grown this year, thanks to his part-time job and various graduation gifts. He has agreed with us that he will pay for certain expenses incurred while away at school, but I expect that a significant portion of those savings will still be sitting there when January and FAFSA time rolls around. We dont qualify for a ton of need-based aid, but he did get a Stafford subsidized loan, a small Perkins loan and a modest New York TAP award this year. Our overall family income is otherwise unchanged this year, and my wife and I are stretching to pay a significant portion of his expenses out of pocket so that none of us have to borrow any additional money, so we really cant afford for our EFC to jump up any further next year.</p>
<p>Im considering asking him to draw down his savings significantly (but not entirely) and pay for as much of his current years expense as he can, with the understanding that we will keep an equivalent amount available in our savings while he is in college sort of a virtual transfer. He could draw from this as needed over the next four years, and once he graduates, we would then gift the balance back to him.</p>
<p>Does this make sense? Is there another way to accomplish this?</p>
<p>Yes - As of last year, 529 plans in the student’s name are assessed for financial aid at the same rate as parental assets. Put his funds into a 529 and it would reduce the amount of them applied each year to his EFC, from 20% down to 5.6%. The only downside that I know of is that the interest from any of those funds not used for college is subject to a 10% penalty (on the interest, not the principal). But even if there’s some penalty on the leftover balance, that should pale in comparison to the hefty hit his savings would otherwise take.</p>
<p>I have a similar question: would it make sense for a student to transfer money into an account under the parents name? And would this have to be done before the base year, or before filing the fafsa?</p>
<p>There are legal and tax implications to transferring money from a child to a parent. Money in a child’s name is legally that of the child, with the custodian having a fiduciary duty to ensure that the funds are spent for the benefit of the child. Any transfer of funds greater than the gift tax exclusion ($13K this year) will also trigger possible gift taxes. Bottom line: don’t do it. If these funds are intended for college, stick them in a college fund as described above and use them to pay for college as intended.</p>
<p>It is a savings account from his gift/work money, and it totals to a little below 13k. Much of it will be spent for college, but ultimately, it is his money. We just don’t want the financial aid to take most of that. Is there an asset exclusion up to a certain amount?</p>
<p>There’s no asset exclusion for the child, only for parent assets.</p>
<p>Student assets are assessed by FAFSA at 20%; parent assets at 5.6%. The easiest way to “convert” a child asset to something that is assessed at the parent rate is to do what gadad suggests above; open a child-owned 529 and move some of the cash from your son’s savings account to it. It’s still his money, to be used for college, but will have less of an impact in the FAFSA calculation because of the special treatment of 529 accounts.</p>
<p>Money invested in a 529 must be used for qualified higher education expenses (tuition, room, board, books, etc) or else it’s subject to a penalty and taxes on the gains.</p>
<p>When you file FAFSA, you enter in a snapshot of your assets at that point in time. So any adjustments you want to make, such as spending some of your savings, should be done with the filing date in mind.</p>
<p>For example, if your son decides he wants to spend all of his savings and buy a car, he should do it prior to filing FAFSA.</p>
<p>Thanks for the help. A 529 sounds like the way to go. One more thing: Our older son just graduated college in June 2010, and our younger son will start in Fall 2011. Will this affect financial aid?</p>
<p>If you have 2 children in college at the same time, each of their calculated EFCs will be roughly half of the total EFC. With only 1 child in college at a time, it won’t affect your EFC.</p>