Parents try to give their children a leg up by putting money away for their college tuition. However, putting money in a savings account under the child's name limits the amount of financial aid the student can get, says the Bankrate.com website.
The federal formula determining the amount of financial aid for which students are eligible includes asset protections for money in a parent's name but none for money in accounts in a student's name. A parent with $100,000 in assets is expected by the government to contribute $6,000 of it to education, while a student with $100,000 in assets is expected to pay $20,000 on student tuition before receiving financial aid.
Furthermore, financial aid is reduced when students have more than $3,000 in their accounts. For every dollar above $3,000, 20 cents is subtracted -- first from federal scholarships and grants, then federal loans.
529 college plans: A popular college saving instrument is the 529 College Savings Plan
As with IRA and 401(k) plans, 529 plans allow parents to save for kids' educations tax-free through many investment options. Some age-based investment packages place funds in aggressive investments while the kids are young and switch to more conservative options as they near college age. Gains on the accounts are tax-deferred, and once the funds are used to pay for qualified tuition expenses, parents pay no taxes on the funds.
UGMA Accounts: The Uniform Gift to Minors Act made possible gifting money and securities to minors, considered the minor's assets, held by an adult account custodian with control of it until the minors turn 18 or 21, depending on the state.
UTMA Accounts: The Uniform Transfer to Minors Act created an extension of the UGMA, set up by the states, allowing tax-free gifts up to $12,000 to minors without setting up trusts. An adult is appointed assets manager and makes payments on behalf of the children until they are 18 to 25, depending on the state, when they gain control of the assets.
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