Error: You can move an UGMA account to other children or can have a
grandparent put it in a 529 plan.
A custodial account (UGMA or UTMA) is the property of the child. A
parent cannot legally take the money from a custodial account and
transfer it to another child. However, the custodian of the account
can legally roll the money into a custodial 529 college savings plan
that is titled the same as the original account.
Error: Some schools have a 3-year lookback period for asset moves.
Medicaid uses a five-year lookback period for asset transfers and
previously used a three-year lookback period.
No college uses a lookback period for asset transfers for student aid
However, if a family's income is volatile from one year to
the next, they can appeal to the college financial aid administrator
for a professional judgment review. Some colleges will respond by
basing the income on the financial aid application on an average of
income during the last three or five years, instead of the prior tax
Error: Having a $50,000 mutual fund owned by child vs. parent yields a
$10,000 difference in financial aid eligibility.
A child asset is assessed at a 20% rate. But that isn't the only rate
that matters. Reportable parent assets above an age-based asset
protection allowance are assessed on a bracketed scale with a top rate
of 5.64%. So a parent-owned $50,000 mutual fund could have an impact
on aid eligibility that ranged from 0% to 5.64%, depending on how many
other assets are owned by the parents. This means that parent versus
child ownership of a $50,000 mutual fund could yield a difference in
aid eligibility of $7,180 to $10,000.
Error: The government is closing out the student loan interest deduction
and the deduction for higher education expenses.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
modified the student loan interest deduction to allow student loan
borrowers to deduct up to $2,500 a year in interest on their loans
indefinitely. Before EGTRRA this deduction was limited to the first
five years in repayment. The EGTRRA provision, however, was scheduled
to expire at the end of 2010. The Tax Relief Act of 2010 extended the
EGTRRA provision for two years through the end of 2012. If Congress
does not extend the EGTRRA improvements further, borrowers will still
be able to deduct the interest on their federal and private student
loans, but only for the first five years of repayment.
The tuition and fees deduction will expire at the end of 2011 unless
extended by Congress.