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How will your investments affect your child’s financial aid prospects?

Posted February 26, 2014 in Advice Column, Pleasant Hill

Though it’s only February, college financial aid officers are already working to determine grants for the school year starting this fall. If you have children you plan on sending to college, how will your own savings and investments affect their chances of getting financial aid?

This depends not only on how much money you have, but also where you keep it. Most colleges base their aid calculations on the Free Application for Federal Student Aid (FAFSA), which currently counts up to 5.64 percent of certain parent-owned assets in determining federal or state aid. FAFSA counts up to 20 percent of a child’s assets, such as a custodian account.

Parent-owned assets counted when determining a student’s need for financial aid include savings and checking accounts, non-retirement investment accounts and other types of assets. You don’t have to report retirement accounts — such as traditional or Roth IRAs, 401(k)s and pensions — on the FAFSA. However, if you take withdrawals from these accounts, they must be reported on the FAFSA as income for the year the transactions occurred — which means these withdrawals could affect your child’s financial aid package the following year.

A 529 plan, is one popular college-savings vehicle. If you own a 529 plan, you will need to report it on FAFSA as a parent-owned asset. When you take withdrawals from the 529 plan, they won’t be counted as parent or student income on FAFSA, and they won’t incur federal income taxes, provided the money is used for qualified higher education expenses. (If you don’t use the money for these expenses, you’ll be taxed and potentially penalized by 10 percent on the earnings.) A 529 plan is counted as a parental asset on FAFSA, some people ask grandparents to own a 529 plan. While the value of an intact grandparent-controlled 529 plan will be excluded from FAFSA, the withdrawals themselves will be counted as untaxed income to the student on the following year’s FAFSA, and this money could certainly affect aid decisions.

At least a year before your first child heads off to college, you may want to contact the financial aid office at a local school to ask questions about FAFSA, scholarships, loans and other aspects of assistance. Since most colleges follow similar rules regarding financial aid, you should be able to get some helpful answers, no matter where your child goes to school.

Even with careful planning, your student may not qualify for financial aid. If this is the case, you will need to consider other strategies for paying for college. Keep in mind: It’s best to develop a savings strategy for both college savings and one’s own retirement goals. Study the financial aid rules, consider investing in college-funding vehicles such as 529 plans, and do whatever you can to help get your kids through school, but don’t forget about your own needs — because they are important, too.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

Information provided by Karl Ritland, Edward Jones, 1100 N. Hickory Blvd., Suite 201, Pleasant Hill, 266-8188, www.edwardjones.com.

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