Reader Beware: Not All College Finance Info is Correct

Posted by admin on in College Advice |

CoCo 130820 0229 Everyone knows that you can’t rely on a stock tip emailed to you from a stranger with bad grammar.   But did you know that you may not be able to rely on the information provided about college finance in the popular press? College Coach finance experts , all of whom are former college financial aid officers , were surprised recently when we found serious inaccuracies in the article Four Accounts Every Mother or father Needs For Their Kids published by the financial advising web site NerdWallet on NASDAQ. com .   We hope that sharing these errors with you—and explaining why the information is wrong—will help you begin to separate the good materials from the bad material so that you can with confidence prepare your college payment plan.

Savings Accounts DO Effect Aid Eligibility

  • “According in order to current government rules, kids can have up to $3, 000 in a savings in their own name without it impacting their eligibility for university cash. ” – NerdWallet

This statement is simply untrue.   There is no allowance for a dependent undergraduate student’s assets in the federal educational funding formula, and most colleges attach a 20 percent assessment rate to student savings each year.   Consequently , if a student keeps $3, 500 in a savings account throughout college considering it won’t impact aid eligibility, he could lose $600 in financial help eligibility in his first year.

UTMA and UGMA Balances and Financial Aid

  • “UTMA plus UGMA accounts are tax-advantaged: the very first $1, 000 in interest they will earn each year isn’t taxed at all; the next $1, 000 is taxed at the child’s income tax rate, that is typically around 5% for most children, and earnings beyond $2, 500 per year are taxed at the parent’s income tax rate. ” – NerdWallet

Though the basic tax advantage of UTMA and UGMA accounts described here is accurate, the five % tax rate quoted for children is not.   After the first $1, 000 of unearned income, a dependent child with no earned revenue faces a 10 percent tax price on interest, short-term capital increases, and tax-deferred account withdrawals (and zero percent on qualified dividends and long-term capital gains) as much as $2, 000.   Remaining revenue is taxed at the parents’ price.

529 Accounts Not really Funded with Pre-Tax Money

  • “These [529] accounts are usually compared to 401(k)s because they are funded simply by parents with pre-tax money plus funneled into an investment that will grow over time. ” – NerdWallet

529 accounts are actually funded with after -tax money—quite the opposite of 401(k) financing.   Though some states offer a state tax deduction for contributions designed to a 529, there is no federal taxes deduction for 529 contributions.   The tax advantage to 529s comes in the accumulation period and on the back end, where account growth can be tax-deferred, and, as long as withdrawals are made for qualified educational expenses, the earnings of the account are tax-free.  

Excess 529 Funds Can Go to Good Use

  • “…If your child decides not to go to university and you have no other children to transfer the [529] funds in order to, you’ll have to pay income taxes on the cash you’ve saved and a 10% penalty. – NerdWallet

Though transfer among siblings is often the most useful use of 529 funds when the initial beneficiary decides not to go to university, it is not the just option for parents to avoid taxation and penalties on 529 earnings.   In addition to siblings, intrafamily rollovers can be made to the parents (or other ancestors), aunts, uncles, nieces, nephews, first cousins, a husband or wife of the beneficiary, or spouses associated with any of the above family members.   Excess 529 funds can also be transferred to children of the beneficiary, allowing account proprietors to help finance even their grandchildren’s education. The 529 intrafamily rollover rules are much more expansive than this article would lead one to think.

Unfortunately, College Coach educators talk to many parents who have produced college finance decisions based on wrong information they found online, in the individual finance press, or from their economic advisors.   Many have lost educational funding eligibility their children might otherwise have experienced.   Others have found themselves unprepared because they did not understand how much educational funding was realistically available.   Mom and dad should realize that many financial professionals lack experience in college finance, and should take care to verify the actual read to ensure that their college planning decisions are guided by information provided by true university finance experts .

Shannon Vasconcelos   is a university finance expert at College Coach. Before joining College Coach, she was obviously a Senior Financial Aid Officer at Tufts University and Boston University.

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