Finding Accurate Info for College Financial Planning: 4 Untruths

Everyone knows that you can't count on a stock tip emailed to you from a stranger with bad grammar.  But did you know that you may not be able to count on the information provided about college finance in the popular press?

College Coach finance experts, all of whom are former college financial aid officers, were surprised recently when we found serious inaccuracies in the article Four Accounts Every Parent Needs For Their Kids published by the NASDAQ financial advising website NerdWallet.  We hope that sharing errors such as these with your employees and explaining why the information is wrong will help them separate the good material from the bad so that they can confidently prepare their college payment plans.

4 Untruths about College Financing

1. "According to current government rules, kids can have up to $3,000 in a savings account in their own name without it impacting their eligibility for college cash."

This statement is simply untrue.  There is no allowance for an undergraduate student's assets in the federal financial aid formula, and most colleges attach a 20 percent assessment rate to student savings each year.  Therefore, if a student keeps $3,000 in a savings account throughout college thinking it won't impact aid eligibility, he could lose $600 in financial aid eligibility in his first year.

2. "UTMA and UGMA accounts are tax-advantaged: the first $1,000 in interest they earn each year isn't taxed at all; the next $1,000 is taxed at the child's income tax rate, which is typically around 5% for most children, and earnings beyond $2,000 per year are taxed at the parent's income tax rate."

Though the basic tax advantage of UTMA and UGMA accounts described here is accurate, the five percent tax rate quoted for children is not.  After the first $1,000 of unearned income, a dependent child with no earned income faces a 10 percent tax rate on interest, short-term capital gains, and tax-deferred account withdrawals (and zero percent on qualified dividends and long-term capital gains) up to $2,000.  Remaining income is taxed at the parents' rate.

3. "These [529] accounts are often compared to 401(k)s because they are funded by parents with pre-tax money and funneled into an investment that will grow over time."

529 accounts are actually funded with after-tax money-quite the opposite of 401(k) funding.  Though some states offer a state tax deduction for contributions made to a 529, there is no federal tax deduction for 529 contributions.  The tax advantage to 529s comes in the accumulation period and on the back end, where account growth is tax-deferred, and, as long as withdrawals are made for qualified educational expenses, the earnings of the account are tax-free.

4. "...If your child decides not to go to college and you have no other children to transfer the [529] funds to, you'll have to pay income taxes on the money you've saved and a 10% penalty.

Though transfer among siblings is often the most practical use of 529 funds when the original beneficiary decides not to go to college, it is not the only option for parents to avoid taxation and penalties on 529 earnings.  In addition to siblings, intrafamily rollovers can be made to the parents (or other ancestors), aunts, uncles, nieces, nephews, first cousins, a spouse of the beneficiary, or spouses of any of the above family members.  Excess 529 funds can also be transferred to children of the beneficiary, allowing account owners to help finance even their grandchildren's education. The 529 intrafamily rollover rules are much more expansive than this article would lead one to believe.

True Expertise is Hard to Come By

Unfortunately, College Coach educators talk to many working parents who have made college financial planning decisions based on incorrect information they found online, in the personal finance press, or from their financial advisors.  Many have lost financial aid eligibility their children might otherwise have had.  Others have found themselves unprepared because they did not understand how much financial aid was realistically available.

Working parents often spend too much time at work scouring the web for college planning information, and wind up only finding half-truths and incomplete information in the end.  When providing employees with financial well-being programming, employers should realize that many financial professionals lack experience in college finance, and take care to ensure that their employees' college planning decisions are guided by information provided by true college finance experts.

Written by: Shannon Vasconcelos

About the Author

Shannon works with Bright Horizons Education & College Advising corporate clients to deliver college financing workshops and provide personalized counseling to employees. She has over 10 years of experience in student financial assistance, at Boston University and Tufts University, and has also served as an active member of MASFAA’s Early Awareness and Outreach Committee, as a trainer for DOE’s National Training for Counselors and Mentors, and as a volunteer for FAFSA Day Massachusetts.