Author Topic: Where does kid's money go?  (Read 2006 times)

milliemchi

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Where does kid's money go?
« on: November 05, 2017, 02:11:55 PM »
I'm posting because I don't have a full grasp of things here.

1) Some years ago, I figured out that a Roth IRA behaves basically the same as a 529, so we're funding our Roths and don't have a 529 for kids' college expenses. This has the benefit of not being considered as available for FASFA.

2) My daughter has a Roth IRA where a little bit of earned income goes. This has the benefit of not being considered as available for FASFA.

3) I started a brokerage account with her money, in my name (still <$100).  This has the benefit of not being considered as fully available for FASFA.

However, now I'm sitting and wondering why I am doing all this financial acrobatics. If I understood correctly, the 'available' money / required contribution offsets loans - so why is it a problem to have to contribute? Isn't that better than borrowing and paying interest? Wouldn't I rather spend my own money than borrowed money? Is it a liquidity concern?

Or - are there need-based grants that may not be awarded if more money is 'available'? It would be really bad to not receive free money (grants) because yours is in one vs another account.

I don't feel bad about our decision #1 (we don't have money to fund both Roth and 529 anyway), nor decision #2 (kid's Roth seems a no-brainer). But #3 will see me pay higher taxes (15% on dividends) than the account would if it were in my daughter's name (0%), so I'd like to think it through a bit more.

Can anyone comment on this?

GizmoTX

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Re: Where does kid's money go?
« Reply #1 on: November 05, 2017, 06:19:05 PM »
I agree that funding a Roth IRA is better than funding a 529 if you can only do one. Put on your own oxygen mask first; you cannot borrow for retirement.

In 2017, if a child's investment earnings top $2,100 (the first $1,050 is untaxed and the next $1,050 is taxed at the child's rate), the excess unearned income is taxed at the parents' tax rate (kiddie tax). This continues until age 23 if the child is a full-time student.


AMandM

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Re: Where does kid's money go?
« Reply #2 on: November 05, 2017, 10:45:58 PM »
The less money you & your child have available , the lower your Expected Family Contribution will be.  Hence your need, which is defined as the difference between the sticker price of the college and your EFC, will be greater.  Greater need *may* make you eligible for more federally-subsidized loans, but it doesn't necessarily translate into you taking on an equivalent increase in loans.

First, each college makes its own financial aid offer to (sometimes only partially) meet your defined need in its own way, with its own mix of grants and loans. That mix can depend on the level of need.  Some colleges with big endowments offer 100% grant aid to students with high need.  (My oldest went to one of these colleges. She made money on her senior year, because she lived simply and spent less than what her college gave her to cover room and board.) So having a high need can be beneficial.

Second, you are not obliged to accept the loans that you are offered.  Suppose that putting $100k in your Roth instead of a 529 causes you to be eligible for an additional $25k in loans. (I'm making these numbers up.) You can simply decline the loan and pay that $25k out of your Roth.  Or, if the loan is subsidized so you don't pay interest till after graduation, take the loan, pay it off at graduation, and meanwhile enjoy four more years of growth.

MrsPete

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Re: Where does kid's money go?
« Reply #3 on: November 06, 2017, 07:18:23 PM »
Respectfully, if you're earning enough to put away money in IRA of any type -- not only for yourself, but also for your child -- you're not going to get anything from FAFSA (except offers of loans) or other need-based programs.

SimpleCycle

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Re: Where does kid's money go?
« Reply #4 on: November 06, 2017, 08:04:45 PM »
Respectfully, if you're earning enough to put away money in IRA of any type -- not only for yourself, but also for your child -- you're not going to get anything from FAFSA (except offers of loans) or other need-based programs.

This is not necessarily true, especially for Mustachians.  My alma mater gives full financial aid with no loans to families making less than $100k.  Certainly someone could be putting away money in an IRA at that income.

topshot

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Re: Where does kid's money go?
« Reply #5 on: November 07, 2017, 08:26:31 AM »
My alma mater gives full financial aid with no loans to families making less than $100k.
Dang. Wish mine did. It's a great school but cost $40K+/yr just for tuition now. Only way I'll send my son there is if he gets tons of aid.

Regarding the OP, I may have to look into a Roth for our youngest. We've had a 529 for years for him but not much in it until his older brother gets out of college. We get 20% (up to $1000) state tax credit for 529 plans here so that seemed like a better deal, but I have never run the numbers on a Roth (or knew that I could use a Roth for his college).

I'm a red panda

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Re: Where does kid's money go?
« Reply #6 on: November 07, 2017, 08:58:47 AM »
We decided to not have a 529 for our daughter and I just keep track of her money in a spreadsheet and it gets mixed with mine. When she reaches adulthood, I'll give it to her with a reasonable interest rate based on my own returns.   When she is about 10 we will open a checking/savings account for her so she can see how banks work and all that.  Right now "her money" is just a bit of Christmas and Birthday cash, and as I cash savings bonds from my college fund (I got scholarships and didn't need them)- I log them on her account.

However, her grandparents disagreed and really wanted a 529, so well, she has one.

milliemchi

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Re: Where does kid's money go?
« Reply #7 on: November 07, 2017, 10:44:42 AM »
Respectfully, if you're earning enough to put away money in IRA of any type -- not only for yourself, but also for your child -- you're not going to get anything from FAFSA (except offers of loans) or other need-based programs.

Is this true? My university used to offer a 100% loan-free ride to anyone with family income below $60K/year. It is easy to live just a couple of hours out in the sticks and live on <$60K, with some money left over. Moreover, I just got an email from them bragging that they have achieved this goal for all domestic students regardless of income, and now are working on doing that for all international students. One of the big California universities (forget which one, Stanford?) offers full rides for people with family incomes of $120K/year. I assume that out in the eastern sticks of the state that is a lot of money.

Apples

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Re: Where does kid's money go?
« Reply #8 on: November 07, 2017, 01:07:04 PM »
Respectfully, if you're earning enough to put away money in IRA of any type -- not only for yourself, but also for your child -- you're not going to get anything from FAFSA (except offers of loans) or other need-based programs.

Is this true? My university used to offer a 100% loan-free ride to anyone with family income below $60K/year. It is easy to live just a couple of hours out in the sticks and live on <$60K, with some money left over. Moreover, I just got an email from them bragging that they have achieved this goal for all domestic students regardless of income, and now are working on doing that for all international students. One of the big California universities (forget which one, Stanford?) offers full rides for people with family incomes of $120K/year. I assume that out in the eastern sticks of the state that is a lot of money.

You guys are saying different things.  What one single college/university does in regards to "need" based aid is separate from what the FAFSA does in qualifying you for federal grants and student loans.  Colleges and universities will use the information you put on that form to make their own need based aid decisions for their students, but the cutoffs are different. 

SimpleCycle

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Re: Where does kid's money go?
« Reply #9 on: November 08, 2017, 11:00:02 PM »
Respectfully, if you're earning enough to put away money in IRA of any type -- not only for yourself, but also for your child -- you're not going to get anything from FAFSA (except offers of loans) or other need-based programs.

Is this true? My university used to offer a 100% loan-free ride to anyone with family income below $60K/year. It is easy to live just a couple of hours out in the sticks and live on <$60K, with some money left over. Moreover, I just got an email from them bragging that they have achieved this goal for all domestic students regardless of income, and now are working on doing that for all international students. One of the big California universities (forget which one, Stanford?) offers full rides for people with family incomes of $120K/year. I assume that out in the eastern sticks of the state that is a lot of money.

You guys are saying different things.  What one single college/university does in regards to "need" based aid is separate from what the FAFSA does in qualifying you for federal grants and student loans.  Colleges and universities will use the information you put on that form to make their own need based aid decisions for their students, but the cutoffs are different.

MrsPete actually said “from FAFSA or other need based programs” and I think there are plenty of examples that show that’s not true.

OP, you really need to familiarize yourself with both federal and institutional financial aid methodology to be able to make the best choice.  Run your numbers through some net price calculators to see if you’re likely to get aid.  If you are aid eligible, how you structure your and your children’s assets can make a big difference.

The reason is that while the FAFSA determines eligibility for federal grant, loans, and work-study, many institutions also use the FAFSA formula to allocate their own financial aid as well.  So you fill out the FAFSA, it assigns you an Expected Family Contribution (EFC), and then the difference between the EFC and the total cost of attendance is your “need”.  Schools that meet full need will give you a package of federal aid (usually loans and work-study) and institutional aid (often grants) to meet that need.  Some schools use a different formula, called the CSS Profile, to determine need.

I’ll give you the example of my freshman aid package to illustrate.  My parents made about $50k when I started college.  I had $10k in my name saved for college in a regular taxable account.  Our EFC my freshman year was $7k - $3500 based on my parents’ income and assets and 35% of my assets.  In addition, there is a summer earnings contribution of $2400.  Total cost of attendance at my college was around $32k.  I was awarded $22,600 in need based financial aid (cost of attendance minus EFC minus summer earnings).  I️t was about $4000 in federal loans, $2000 in work-study, and the rest was grants from my school.  If those $10k in assets had been in my parents name or even better in an IRA in their name, our EFC would have been $3000-$3500 less and I would have received additional grants.

In addition, my school’s policy let any non-need based scholarships replace the loan portion of your award, so I had $3500 in scholarships that allowed me to only take out $500 in loans that first year.

All this varies wildly depending on the school, but it is wise to minimize your EFC under both the FAFSA and CSS Profile formulas to set your children up for maximum aid assuming your assets and income don’t put you well outside of aid range.