Many times parents save in the child’s name to save on taxes without realizing the taxes saved may be less than the aid they give up due to financial aid rules.
Why? Because money in the student’s name counts almost 4 times as much against getting aid as compared to money in the parent’s name. Thus, any money in the child’s name reduces the financial aid they may receive. It is not the investment that is at issue, the very same investment could be inside each option, the problem is how the account is titled (who owns it).
The answer really depends on your future financial situation instead of your financial situation right now because all those variables only matter January 1st of each year the student will be in college. There is an interaction between tax impact on the one hand, and financial aid impact on the other hand.
In general, the less the student has, the greater the financial aid (types of aid), up to limits based on the parent’s situation. Also in general, if you want to ensure college may be paid for in part or in full, the best course of action is to save for it rather than rely on aid for all education expenses. If you are going to save for education, what are your options? Importance of how you title (who owns and controls the money) the account was discussed above, below are the title options.
In general the account title choices for college savings plans falls somewhere along this spectrum:
Taxation versus ability to control (ownership) how money spent
Tax deferred/free Taxable
Limited choices No limits on what money used for
(must be used for specific expenses)
*UTMA: becomes the child’s money when they become of age.
Must be spent in minor’s interest
More about the Coverdell Education Savings Account vs 529.
The legitimate website to file for federal financial aid is FAFSA.ed.gov.
Forecast student aid using the FAFSA4caster (or use the link in sentence above and then click on FAFSA4caster link on FAFSA homepage when it becomes available each year – or use the FAFSA search box for it).