Kevin McCormally: I am Kevin McCormally of Kiplinger's. I am here with Janet Bodnar, Deputy Editor of Kiplinger's Personal Finance Magazine. We are talking about saving for College and Financial Aid.
Janet, there always a lot of stories about parents who save diligently for the kids college education and then supposedly get punished because then they don't get the college aid, whereas the parents who didn't save get the college aid. Is there any truth to that?
Janet Bodnar: That's really not necessarily true, Kevin for a number of reasons. First of all, when schools figure out their financial aid formula, your income really counts more than your assets do, so that's really what's going to determine mostly whether you are going to get aid or not aid.
Kevin McCormally: So it's okay for parents to save in their own name, they are not going to be punished?
Janet Bodnar: It is okay for parents to save in their own name, in fact it's a good idea because if you are only going to be offered loans as part of your financial aid package, it's nice to have savings and there are smart ways to save money and to still qualify for financial aid.
Kevin McCormally: What are they?
Janet Bodnar: Well as luck would have it, luck and good planing would have it. All of the major college savings plans for example, the State 529 Plans or the Coverdell Education Savings Accounts or the State Prepaid Tuition Plans, all of those are considered parental assets for purposes of financial aid and parental assets are always tapped much less than a students assets are. So this is good news for parents who have saved in those plans in their own name.
Kevin McCormally: Okay is their ever a reason to save in the child's name?
Janet Bodnar: Sometimes, if you earn too much money to qualify for financial aid that's usually for a family that has a income over a $100,000, it might make sense to save in the child's name because you are not going to get aid anyway and you do get some tax breaks if you save in your child's name.
Kevin McCormally: What are those tax breaks?
Janet Bodnar: Well for a child, child this year can earn $850 in unearned income. That would be interest dividends and capital gains without having to pay tax then the next $850 the child earned is taxed at the child's rate and for a child dividends and capital gains are taxed as low as 5% so that's a really good deal.
Kevin McCormally: So Uncle Sam sort of contributes to that college fund too.
Janet Bodnar: Exactly.
Kevin McCormally: Thank you very much, Janet.
Transcription by:
Scribe4you Transcription Services