What free college means for savings plans

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Q. With more and more politicians pushing for free college, would a custodial account be better than a 529 account for a newborn because it allows more flexibility in the future?
— Parent

A. Free college sounds nice, but it’s not as simple as it sounds.

While it’s true that many politicians are pushing for free college, if you read the fine print, much of the “free” would be based on need, said David Slater, co-founder of College Benefits Research Group (CBRG) in Roseland.

That being said, your question relates to the benefits of 529 accounts versus the flexibility of custodial accounts.

529 plans allow after-tax dollars to grow tax-deferred, and then they’re withdrawn free of tax when spent on qualified educational expenses, Slater said.

“They provide no investment guarantees, they are not self-completing in the event of the death or the disability of the parent, and the funds are specifically included on the Free Application for Federal Student Aid (FAFSA),” he said. “Moreover, the 529 plans are usually set up with the parent as the owner/participant and the student as the beneficiary.”

This means that all of the 529 plans owned by a parent for their children get included in the parent’s assets for the Expected Family Contribution (EFC) calculation, not just for the student attending college, he said.

Then there are custodial accounts. These are known as a Uniform Gifts to Minors Act (UGMA) account or a Uniform Transfer to Minors Act (UTMA) account.

UGMA and UTMA custodial accounts are student-specific, which means that only the relevant student’s UGMA and UTMA assets will be included in the FAFSA equation, Slater said.

“The negative is that the student’s assets are counted at a much higher percentage in the EFC calculation than the percentage of the parents,” he said. ” This can cause more problems when applying for need-based aid.”

To your question on which account is better, the actual answer is that both have their benefits and possible drawbacks, and no one option is right for everyone.

“There are other options as well such as saving dollars for college but not putting them in the student’s name,” Slater said. “Also understanding how any college savings may be assessed in any financial aid calculations should be factored in as well. All options should be considered in an overall plan to fund college.”

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