22 Jul Using college savings to buy a car

 Q. I have $120,000 in a 529 plan for my son. He has $15,000 in an UTMA and $5,000 in savings bonds. When he goes to college, I think it will cost $30,000 a year including room, board, textbooks and all. Would it be a bad idea to use his UTMA money for a car?

A. Before we get to the specifics of your question, let’s first talk about the process of applying for financial aid.

You should apply no matter how much you’ve saved, said Jim McCarthy, a certified financial planner with Directional Wealth Management in Rockaway.

The first step is to complete a Free Application for Federal Student Aid (FAFSA).

“Almost every college uses the FAFSA to determine a family’s Expected Family Contribution (EFC),” he said. “The FAFSA looks at the student’s assets and income as well as the parent’s assets and income.”

McCarthy said the EFC is a rather complicated formula, but the student’s assets and income are considered at a higher level than the parent’s assets and income. Assets such as savings bonds and UTMA accounts are considered student assets, he said, while 529 accounts are considered parental assets.

The next step is to check a “net price calculator” to determine the estimated net cost — after financial aid — for the school(s) your son is considering.

Most schools will have a calculator on their website, or you can check The College Board’s web site,  where you can compare several schools, McCarthy said. This will give you a better idea of what the cost of your son’s education might be.

All that being said, it would be a good idea to use the UTMA money for an automobile purchase, said Kim Viscuso, a certified financial planner Stonegate Wealth Management in Oakland.

“Withdrawals from an UTMA account can be used to pay for non-educational expenses so long as they are used for something that is for the benefit of the minor. A car would fall into this category,” she said.

These types of accounts are typically turned over to the beneficiary’s control between the age of 18 to 21 — depending on the state in which the account was opened — and they can use the funds in any way they choose at that time, Viscuso said.

“There is no penalty if the proceeds are used to pay these non-educational expenses, regardless of the child’s age,” Viscuso said. “A car purchase made with 529 funding would incur a 10 percent penalty.”

Because federal law imposes the 10 percent penalty on earnings for non-qualified distributions from a 529 plan, she recommends using the 529 plan first for the education expenses.

“If the education expenses exceed the estimated $30,000 annually, the next asset to utilize would be the savings bonds,” she said. “They may be able to be cashed, without having to include in your income some or all of the interest earned on the bonds, if they are used for qualified education expenses.”

Plus, spending the UTMA funds before you apply for financial aid will get those dollars out of the picture, and that may help you qualify for more aid.

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This story was first posted in July 2015.