Smart College Financial Aid Moves: How Parents Can Save Wisely Without Hurting Eligibility

For parents planning to send their children to college, here's a little-known secret: Some tax-saving moves you make now could hurt your student's chances of getting financial aid later. This is because of how the financial aid system treats different types of assets.

Retirement plans and IRAs don't count for college aid purposes. You’re not expected to dip into these accounts to pay for tuition, which offers a tax-advantageous way to save. But there’s a critical distinction you need to understand: The government expects 20% of assets in your child’s name to be used for college costs, compared to only 5.6% of assets in the parents’ name. As a result, keeping assets in your name, especially during your child’s last two years of high school, is a wise move since this is when tax returns are typically reviewed for financial aid eligibility.

Another common misconception is that relatively well-off families won’t qualify for any aid. But with the rising costs of college, many schools offer programs for families who meet certain criteria, even if they aren’t financially struggling. For example, merit-based awards are often granted to students with outstanding academic achievements, such as high standardized test scores and strong grades.

The best strategy for parents? Don’t hold back on contributing to your retirement plan to save for college in your child’s name. Retirement account contributions are usually tax-deductible, and the earnings grow tax-deferred until they’re withdrawn. This not only provides tax benefits but also helps preserve your family’s eligibility for financial aid.

Additionally, remember that many 401(k) plans allow you to borrow against them for college expenses. And under a tax law passed in 1998, you can withdraw a limited amount from your IRAs penalty-free to pay for higher education costs for yourself, your children, or even your grandchildren.

Need help navigating college savings and financial aid strategies? Contact Verity CPAs at info@verity.cpa or call 808.546.5026 today for expert guidance!