College Savings: An Update
Congress is known for passing enormous bills with lots of little-known provisions that are not entirely central to the key objectives of the bill. Alas, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 is one of them. It contains changes to how students and parents apply for student aid via the Free Application for Federal Student Aid (FAFSA). While the changes won’t go into effect until the 2024-2025 academic year, the first year for new income reporting rules will be 2022.
Updates to the FAFSA are meant to simplify the application process by reducing the number of questions asked and altering how certain calculations are made. Specifically, the application process will drop about 60 questions from the current form, and the process will be even simpler for low-income applicants. Another change is that the term used to determine how much families will pay will be renamed “student aid index” (it is currently “expected family contribution”). Although the form is expected to take less time to complete, it is still likely to be complicated. Experts say that one outcome may be that families with multiple children in college at once may qualify for less aid.1
The new rules also affect how divorced parents complete the forms. Currently, the parent with the most custody fills out the forms, but this will change to the parent who pays the most in child support. This could add to the challenges divorced spouses face in getting one parent to become more engaged, even if it would lead to the child receiving more student aid. Moreover, the quagmire of individual divorce agreements — or lack thereof — could complicate this process even further.2
If you’re looking for ways to save for college, there are many, and they are typically no easier to understand than other types of investments. However, that’s what we’re here for. We can help you navigate the web of resources and tailor a solution that works best for your family and finances. Feel free to contact us for more information.
Grandparent Savings with a 529 Plan
The new rules also impact who helps pay for college and by how much. A 529 college savings plan allows the account owner to open, fund, and choose the investments and the account beneficiary — yet still, maintain control of the assets. The account owner decides when and where to disburse funds and can even change the beneficiary or close the account and keep the money. Contributions to 529 accounts are made with after-tax income, but earnings and withdrawals avoid federal income taxes if used to pay for qualified education expenses.3
Presently, when grandparents help fund college expenses with a 529 plan, that income gets reported on the FAFSA form as untaxed student income. This, in turn, can reduce the amount of aid for which the student is eligible. However, the new simplified FAFSA will no longer ask about these funds, so students may qualify for more aid.4
We have seen that there are often two types of accounts that are often used to help provide college funding. The Uniform Transfers to Minors Act (UTMA) and Universal Gifts to Minors Act (UGMA) allow the transfer of financial assets to a minor without establishing a trust. However, be aware that while these accounts are controlled by the custodian, they are held in the name of the minor and relinquished to the child once he or she reaches the age of majority in that state.5
Coverdell Education Savings Account (ESA)
The ESA, which was previously referred to as an education IRA, enables parents to invest for tax-free earnings as long as the money is used for qualified educational purposes. Coverdell funds may even be used to pay for eligible K-12 schools. The annual contribution limit is $2,000, so consider starting to save early to accumulate potential earnings to help offset future education expenses.6
Content prepared by Kara Stefan Communications.
1 Fidelity. June 18, 2021. “Plan now for changes coming to college costs.” https://www.fidelity.com/learning-center/personal-finance/college-planning/college-aid-fafsa-changes. Accessed June 24, 2021.
3 Mark Kantrowitz. Forbes. Mar. 14, 2021. “Covid-19 Rescue Plan Has More Than Just Tax-Free Student Loan Forgiveness.” https://www.forbes.com/sites/markkantrowitz/2021/03/14/covid-19-rescue-plan-has-more-than-just-tax-free-student-loan-forgiveness/?sh=19d658021aeb. Accessed June 24, 2021.
4 Fidelity. June 18, 2021. “Plan now for changes coming to college costs.” https://www.fidelity.com/learning-center/personal-finance/college-planning/college-aid-fafsa-changes. Accessed June 24, 2021.
5 Kristen Kuchar. Saving For College. June 22, 2020. “What is an UGMA or UTMA account?” https://www.savingforcollege.com/article/what-is-an-ugma-or-utma-account. Accessed June 24, 2021.
6 Julia Kagan. Investopedia. June 22, 2021. “Coverdell Education Savings Account.” https://www.investopedia.com/terms/c/coverdellesa.asp. Accessed June 24, 2021.
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