Question: I recently heard that parents and grandparents should not save for college for their kids/grandkids because it will reduce the student’s chances for financial aid. How do you feel about this?
Answer: I think that kind of advice is irresponsible and very misleading! It is a well-known fact that family savings can reduce financial aid but to spin it into a suggestion that a family shouldn’t save for a child’s college education is nuts. What is important, and can’t be emphasized enough, is that parents should save for college and that some ways of saving for college, in particular 529 Plans, are better than others. Poor advice like this is easy to give for people that don’t know what they are talking about.
I once read an article by a freelance writer, not by any means a financial planner, who quotes a researcher as saying, “Under current tax and financial aid policies, saving for their children’s college education can make parents worse off than if they never saved at all.” The author cites this statement as “new research” but never explains what that means or how parents could be worse off. Instead, he goes on to report what the researcher says about how different ways of saving for college can affect financial aid. She says what most parents already know --that saving for college in the child’s name (using a Uniform Trust for Minors Act (UTMA account) is the worst way and using 529 Plans and Education Savings Accounts (ESA) are the best ways. That’s because UTMA accounts are considered to belong to the student and 20% of a student’s assets count in the calculation of the Expected Family Contribution (EFC). On the other hand, 529 Plans and ESAs are considered to belong to the parents and only 5.64% of these college savings plans count toward EFC.
The article does a disservice to parents by inferring that they should not save for college, thereby providing a rationalization and excuse for spendthrift parents. The negative consequences of not saving for college far outweigh any benefit. Here’s why:
1) When your child is ready for college, your income may be too high to qualify for financial aid. Then you’ll have to reduce your own standard of living to pay tuition and expenses and/or send your child to a less expensive and perhaps less appropriate school.
2) A great deal of financial aid comes in the form of loans that your child will have to pay back after graduation. Too much debt for a new graduate can be overwhelming. If you choose to help her pay that debt, you will be forced to use current income or retirement savings, neither of which will be a desirable option.
3) Even if your child qualifies for financial aid, if you don’t have any college savings available, how will you supplement that aid? Most financial aid packages won’t pay for 100% of tuition, room, board, and living expenses.
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to firstname.lastname@example.org.