Education Planning Common Questions |
Can an UGMA/UTMA Account Reduce My Child's Financial Aid For College?
Answer:
It can, but in the same way that any other asset held by your child can. An UGMA/UTMA account is a custodial account established at a financial institution for a minor child and managed by a parent or other designated custodian. It is established under either a state's Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA).
Because an UGMA/UTMA account is held in your child's name, it is considered your child's asset. The federal government's financial aid formula treats your child's assets differently than your assets. Under the current federal formula, children must contribute 35 percent of their assets to college costs each year before any financial aid is forthcoming, while parents must contribute only 5.6 percent of their assets (note: the 35 percent contribution figure for student assets is set to decrease to 20 percent beginning July 1, 2007).
For example, $10,000 in your child's UGMA/UTMA account would result in a $3,500 required contribution from your child. The same $10,000 in your bank account would result in a $560 required contribution from you. That is, you must contribute this amount before your child is eligible for any financial aid.
As a result of this formula, any asset that your child holds, including an UGMA/UTMA account, will always translate into a higher monetary contribution to college costs than if the same asset were in your hands. It follows that the more money your family is required to pay up front for college costs, the less financial aid your child will receive. And even though your child will be entitled to less financial aid, that may not be such a bad thing. The main component of the average financial aid package consists of loans that must be paid back. The more money your child pays for college up front, the fewer loans you or your child will have to repay.
[an error occurred while processing this directive]
