College financial aid

[MomofFour]

I would like to get more info on how parents assets affect financial aid. Our household income is on the lower end, but we do have some assets.

Are there certain types of accounts that affect aid more than others (ex. ROTH IRA, 401k, MMA, etc.)?

What about 529 plans, how much are they factored in when determining aid?

Thanks in advance!

[boosami]

In general, money that you can actually use to pay for secondary education will be taken into consideration, possibly including any equity in your home. So 529, income, investments, and savings minus your bills and living expenses. If you truely can't afford to pay for a portion of the eductation, you may qualify for financial aid.

Note you can still get normal student loans without having to demonstrate a financial need... But you do have to demonstrate that you can't afford it to get an federal subsidized loan, grant, or work-study.

[simpletron]

this only applies for the federal aid because each institution is allow to have its own formula for financial aid. so they can include or not include any of these things and at different rates.

retirement accounts(401k, IRAs, 403b,...) are not included in the formula as assets. other things that aren't included are primary home equity, cash value of life insurances and annuities. if it is not one of those it is included as an asset. so checking acounts, savings accounts, MMA(if not in retirement account), mutual funds(if not in retirement account), saving bonds, 529s, ... are all counted as assets.

there are two categories of assets, parents and the student. the parents are expected to contribute up to 5.6% of their assets and students are expected to contribute 20% of thier asssets. 529s are considered as parents' assests. custodian accounts are students assets.

some weird things:
401k contributions for the year you apply is considered untaxed income.
if grandparents have a 529 for your child, it doesn't count as an asset.
if you're divorce, you only have to inculde assets and income of the one custodian parent.

[MomofFour]

some weird things:
401k contributions for the year you apply is considered untaxed income.
if grandparents have a 529 for your child, it doesn't count as an asset.
if you're divorce, you only have to inculde assets and income of the one custodian parent.

My son's godparents have set up a 529 for him, so that won't count? But it would count against them if they try to get financial aid for their kids?

[boosami]

Yes, 529 accounts are tied to the owner of the account--not the beneficiary. Anyone can open a 529 account and then use it for secondary education expenses for anyone, including one's self.

[noppenbd]

My son's godparents have set up a 529 for him, so that won't count? But it would count against them if they try to get financial aid for their kids?

Are your son's godparents related to him by blood? I thought you could only establish 529 accounts for qualified family members (spouse, child, parent, brother, uncle, niece, etc).

[MomofFour]

Are your son's godparents related to him by blood? I thought you could only establish 529 accounts for qualified family members (spouse, child, parent, brother, uncle, niece, etc).

Yes, they are his aunt and uncle.

[noppenbd]

Ok, that clears it up. And no, an aunt/uncle's 529 should not count against financial aid for your son, only for their own kids, AFAIK.

[boosami]

You do not have to be a relative. You can choose anyone as the beneficiary--relative, friend, neighbor, acquaintance, anyone. It's not like a trust where the money eventually belongs to the beneficiary... The money belongs to the owner and can only be designated for use by that person. It has no tax or income implications for the beneficiary, only the owner.

You can even change the beneficiary. It's common for a couple without children to open a 529 plan with the owner named as the beneficiary. Then, when the child is born, change the beneficiary to the child.

That said, different state plans have slightly different rules, especially in regard to state tax exemptions.

[noppenbd]

boosami- I did a little more research and it looks like you are right, you can open a 529 with anyone as the beneficiary. However, you will have some tax consequences if you try to change the beneficiary to someone that is not in the beneficiary's family.

For example:
Open a 529 for your friend's child. Decide later that you don't like that friend so much, and try to change the beneficiary to your own child. You're going to owe a 10% penalty on that, and taxes on the gains.

At least this is how I read IRS pub 970. Please correct me if I'm wrong.

[jIM_Ohio]

this only applies for the federal aid because each institution is allow to have its own formula for financial aid. so they can include or not include any of these things and at different rates.

retirement accounts(401k, IRAs, 403b,...) are not included in the formula as assets. other things that aren't included are primary home equity, cash value of life insurances and annuities. if it is not one of those it is included as an asset. so checking acounts, savings accounts, MMA(if not in retirement account), mutual funds(if not in retirement account), saving bonds, 529s, ... are all counted as assets.

there are two categories of assets, parents and the student. the parents are expected to contribute up to 5.6% of their assets and students are expected to contribute 20% of thier asssets. 529s are considered as parents' assests. custodian accounts are students assets.

some weird things:
401k contributions for the year you apply is considered untaxed income.
if grandparents have a 529 for your child, it doesn't count as an asset.
if you're divorce, you only have to inculde assets and income of the one custodian parent.

Interesting that a coverdell IRA will be included in the assets, but an IRA will not- you can withdraw from an IRA and use for qualified education expenses without paying 10% penalties. See my post in the other thread for the IRS details I pasted from

http://www.irs.gov/pub/irs-pdf/p970.pdf

[boosami]

Yes, that is correct for the majority of 529 plans. You are able to change the beneficiary without penalty if the new benficiary is in the same family as the previous beneficiary. For example, you can change from your older child to the next younger child with no penalty/taxes. Or from a neighbor's first child to the neighbor's second child.

Some states allow more leniancy with beneficiary changes, and some plans are very rigid where you cannot open an account listing the owner as a beneficiary.

[noppenbd]

Interesting that a coverdell IRA will be included in the assets, but an IRA will not- you can withdraw from an IRA and use for qualified education expenses without paying 10% penalties. See my post in the other thread for the IRS details I pasted from
http://www.irs.gov/pub/irs-pdf/p970.pdf

Right, this is why you should probably not contribute to an ESA or 529 until you have maxed out your IRA for the year. (I am ignoring the state tax break on contributions to the state 529 plan in some states).

[jIM_Ohio]

Right, this is why you should probably not contribute to an ESA or 529 until you have maxed out your IRA for the year. (I am ignoring the state tax break on contributions to the state 529 plan in some states).

I would add contributing to 401k to max before the 529/ESA as well-
two reasons

a 401k loan for education might be an option
If you get enough in 401k you can retire early and then use the IRA rules to withdraw the money tax free.

Avoided tax going in, avoided tax coming out too.

[disneysteve]

Right, this is why you should probably not contribute to an ESA or 529 until you have maxed out your IRA for the year.

I would add contributing to 401k to max before the 529/ESA as well-
two reasons

a 401k loan for education might be an option

I agree that you should fund your IRA and 401k first, but not because you could later borrow against the 401k or do a qualified withdrawal from the IRA. The reason you should fund the retirement plans first is because THEY ARE MORE IMPORTANT! Retirement savings should come BEFORE college savings. If you aren't adequately saving for your own retirement, you should not be saving for your kids' college education.