Dear College Money Guru,
I have opened 529 accounts in Missouri for three of my children and have accumulated about $90,000. Each of my 4 children also has an educational IRA, with about $8,000 total. I am worried that the more I save for my children, the less chance they have of receiving financial aid. Am I better off converting those 529s to my and my wife's names? Can that be done? And am I better off to stop adding monies into these accounts?
-- Samuel
Dear Samuel,
The 529 savings plans and Coverdell ESAs, previously named education IRAs, that you have for your children will have some impact when it comes time to apply for financial aid, but perhaps not very much. These investments are treated as parental assets and reduce your child's eligibility for federal student aid by a maximum 5.64 percent of their value at the time of application. That's a lot better than assets in Uniform Transfers to Minors Act, or UTMA, accounts, which are assessed at 35 percent in the aid formula.
If you were to stop making contributions to the ESAs and 529 plans, where else would you invest the money? In terms of financial aid impact, you will be no better off if you use mutual funds or other investments in your own name, as the 5.64 percent inclusion factor will still apply. On the other hand, you do have some other options that could improve your position. Retirement accounts, such as IRAs and 401(k)s, are excluded from the formula, and so are life insurance and annuities. The equity in your home is not counted either, so you might consider paying down your mortgage. (However, many institutions count home equity in determining who qualifies for school-based grants.)
But before making any dramatic money moves in an effort to increase your children's financial aid eligibility, I suggest you first make a realistic assessment of your chances for need-based aid. Did you know, for example, that family income can be more important in determining a student's aid eligibility than family assets? Your expected family contribution will include up to 47 percent of your income and 50 percent of the student's income, after certain allowances are taken into account.
It's also important to realize that 60 percent of all student aid is loans, and only 40 percent is scholarships and grants. Interest rates and repayment terms for aid-eligible families are admittedly rather attractive, but remember that debt is debt, and loans do have to be paid back. Interest rates are rising, and the 2006 federal budget also will make student loans more expensive.
With four children, your chances of qualifying for financial aid are significantly higher than for a family with just one child, especially if you will have more than one child in college at any one time. You should undertake a thorough investigation of your financial aid situation no later than the fall of your oldest child's junior year in high school, and then decide whether it makes sense to reposition your assets and income. The U.S. Department of Education's Web site, www.ed.gov is a terrific resource. You might also enlist the help of a professional college planner, but be wary of any expensive insurance products that may be recommended to you. In the meantime, you should continue to feel comfortable with your decision to set aside college funds in 529 plans and ESAs.