6. Smart saving strategies
by Sarah Max
It's true that your family's income makes a big difference in qualifying you for most aid. But savings matter as well. Some critics maintain that schools punish those who, regardless of income, have scrimped and saved to pay for college. But schools have become much more sensitive when taking savings into account. It does not pay for parents to forgo saving money for college in the hope of receiving more aid. It is important, however, to find savings tools that will not hamper your ability to get more aid.
Most important, don't shortchange your retirement savings to save for college. The financial aid formula also assumes you can contribute "discretionary net worth," which is no more than 5.6 percent of your total net worth. And if you are older than 45, you will get an asset protection allowance as well, presumably because you need to use your savings for retirement. Your child's assets are a different story. Any money in your child's name is assessed at least a 35 percent rate. That's why it almost never pays to put savings in your child's name if you want to qualify for aid.
And if you are considering opening a 529 savings account, proceed with caution. These savings plans, available in most states, allow earnings to grow tax-free starting in 2002 (many states award a tax deduction for contributions as well).
The tax benefits of 529 plans are unmatched. Right now, however, it is unclear how 529 savings plans will be treated for financial aid purposes. In the past, earnings were categorized as the student’s income and, as such, reduced aid. Now that earnings are not subject to taxes, there is a chance that 529 plans will have no effect on aid. That’s the best-case scenario. On the flip side, these plans could be treated more harshly than they were in the past. Joe Hurley, founder of Savingforcollege.com expects the Department of Education to offer some guidance on this subject this summer, before parents start applying for 2002/2003 financial aid.
Even if 529 withdrawals do affect aid, you don't have to skip the accounts altogether. Just make sure you only stash enough for the final year or two in the 529 account. Take out the biggest chunk to pay for senior year (when you no longer need to worry about qualifying for financial aid), and then the rest for junior year. In the student's first years of college, you may only want to withdraw a few thousand dollars or so, depending on your income.
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