Quote:
Originally Posted by cptacek
I would suggest investing in a Roth IRA.
First of all, the FAFSA (the form you fill out to determine if you get Federal Financial Aid for college) doesn't consider Roth IRAs as an asset. Some colleges might, though, as the following article points out.
Roth IRAs and Financial Aid - Kiplinger.com
Here is another article about financial aid...this one points out that state schools generally use the federal formula, while private schools might not:
Roth IRA - not a great gift for a 16-year-old? « Student Loan Info for Parents
But one thing that I think this author is missing is that if you invest $4000 in a Roth IRA and even if that gets counted as an asset, the formulas don't expect you to cash the whole thing in to pay for college. As the first article says, maybe 25%. So, you would have to come up with $1000.
The great part of the Roth is that that you can take money out of it at any time, including to pay for college...up to what you put in. If you put in $4000 this year and $2000 next year, and you then need to pay for college, but the account is now worth $7500 (because the stocks went up), you can take out $6000 any time and not pay a penalty on it.
Maybe look at my blog to see a little more about beginning investing...
Beginning Investing: Cptacek's Personal Finance Blog |
If a person is smart enough to open a Roth at age 15 or 16, then I would hope that same person is smart enough to borrow for school at 5% (or less) while Roth grows at 10%+ while in school.
Cashing the Roth out for education does not seem right to me.
Financial aid is highly overrated... most aid I received was in subsidized student loans, which had an interest rate .25% below the unsubdized loans I also received.
The amount parents make will influence the calculation more, and I would not make an investment decision based on a 4 year period of time (college) where assistance might be offered or rejected based on the investment choice.
A 16 year old should be investing for long term, college is a short term need. I would even suggest a 16 year old which is investing might be better off working at ages of 19 and 20, setting more money aside, then do night school or go back to school at age 21 as an independant. In this case there are great tax deductions for students to take (tuition is tax deductable, I think).