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Townhall Finance
Student Savings
Plans
by Carrie Schwab Pomerantz
Dear Carrie: I've always encouraged my daughter to work to contribute
to her college costs and she's managed to save quite a bit. Now I'm
told that her savings may actually work against her in terms of
financial aid. Why is this? Is there anything we can do? --A Reader
Dear Reader: I think it's great that your daughter is saving for
college. To me, having kids contribute to college costs has a double
benefit: It not only instills good savings habits, it also gives
students a personal stake in their education.
However, when it comes to qualifying for federal financial aid, there's
a bit of a catch-22. That's because student assets and income are
treated differently than parent assets and income in financial aid
formulas. As a result, it's true that your daughter's savings could
reduce her financial aid eligibility.
Some of this may feel odd -- I agree -- but by paying attention to the
rules, you protect yourself and your daughter from losing out on
valuable benefits. Therefore, it's important to understand the rules
before you fill out the Free Application for Federal Student Aid
(FAFSA).
Understand the Percentages In determining federal financial aid, 20
percent of a student's assets are considered available for college
expenses. Basically, this means that every $1,000 held in a student's
name -- whether in a bank account, custodial account or trust fund --
reduces a potential financial aid award by $200.
On top of that, 50 percent of a student's income above a certain limit
is considered available for college expenses. The limit for 2013-2014
is $6,130. Every dollar earned over the limit decreases a potential
award by 50 cents. By contrast, only 5.64 percent of parents' assets
are considered available for college expenses.
There's also an asset protection allowance (which increases as the
parents age), so a certain percentage of assets won't be counted.
Retirement accounts and the value of your primary residence are also
excluded. Consider Where to Keep Future Savings All this points to the
benefit of keeping college savings in your own name. You don't say how
close to college your daughter is, but if it's still a couple of years
down the road, it would be wise to think about where to put additional
savings before the time comes to apply for financial aid.
Read the rest of this article at Townhall Finance
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