College Savings Accounts

Graduation cap sitting on one hundred dollar bills representing cost of college and university education.

Should I save for college in my name or my child’s name?

Saving for your child’s college education represents an investment in your child’s future. After all, the average cost of a college education has been rising steadily for decades – about 7% per year according to Forbes business magazine. That trend is expected to continue indefinitely.

Similarly, a study by the National Center for Public Policy and Higher Education has found that low- to middle-income families spend about 27% of their annual income on post-secondary education costs. That figure has increased from just 13% of income in 1980 and continues to rise.

Federal Financial Aid Formulas

It’s essential to save for your child or grandchild’s education. This imperative has led some parents and grandparents to ask, “Should I save for college in my name or in my child’s name?”

Here are some considerations: When students apply for Federal financial aid, they must contribute at least 20% of their assets toward college costs. In contrast, parents must contribute 5.6% of their assets toward college costs.

For example, a child has a save-for-college account in his or her name with $10,000 in assets, he or she would have an expected contribution of $2,000 toward college costs. If the account were in his or her parents’ name, however, the expected contribution would equal only $560. Basically, a save-for college account in a child’s name lessens the amount of aid available by 20% of the account’s assets, while an account in a parent’s name lessens the available aid by 5.6% of the account’s assets.

Kiddie Tax

It once made financial sense to open savings accounts under children’s names. When children were taxed at their own rate, they generally paid much less than did their parents. However, tax laws change. The passage of the “kiddie tax” a few years ago closed this loophole.

Today, if children have investment income over a certain amount – currently $1,900 – some of it is taxed at the parent’s rate, which is usually much higher. The “kiddie tax” applies to children under age 18, as well as to those 19 to 23 years old who are registered as full-time students and have earned income that’s less than half of their support. The impact of the “kiddie tax” is mitigated when the account’s annual income is less than $1,900.

Keeping it Under Control

When a parent opens a custodial savings account for their child, it’s just that – custodial. Depending on the state, control over that money will transfer to the child when the child reaches the age of majority.  Many 18 to 21-year-olds are capable of using that money wisely, such as for college tuition and related costs Other young adults might not yet have that self-control.

Accounts in children’s and or parents’ names each offer benefits. Only you can decide what’s best for your family.

In addition, it’s important to consider not only in whose name to open a save-for-college account, but also to research the save-for-college options. One option is the Gerber Life Insurance College Plan, which doubles as a life insurance policy for the parent or grandparent during the term of the policy.

Whatever you decide, a college education will open doors for your child’s future.

 

Sources:
1) http://www.finaid.org/savings/accountownership.phtml
2) http://money.msn.com/college-savings/3-college-myths-that-will-cost-you-weston.aspx
3) http://www.irs.gov/taxtopics/tc553.html
4) http://money.usnews.com/money/blogs/On-Retirement/2011/12/22/should-i-save-for-retirement-or-college

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