MONEY-SMART KIDS
Save Now to Avoid Financial Aid Crunch
by Janet Bodnar

In your recent column on custodial accounts, you said that "the best alternative would be to spend the money in the account for your son's benefit before it's time to apply for college aid." I set up custodial accounts for both of my children, and have invested in them for almost 20 years. Now that I have a college freshman, that money is paying for his education without a need-based grant or a college loan, or tapping my retirement savings.

Both of my kids will be able to afford a college education without having to start their lives in debt. I don't understand why I should blow their money on something in order for them to qualify for low-interest loans. Spending their assets on college is both appropriate and fiscally prudent because that's why I invested in the first place.

You raise an excellent point, and I'm happy to tackle it.

My column specifically addressed a situation in which a reader felt his son's savings would hurt his chances for college aid. That can sometimes be the case because financial-aid formulas generally require students to contribute more than one-third of assets held in their name to pay college bills, versus only 5.6% of assets held by parents. You can't shift assets back from kids to parents, but if you spend a child's money on things that legitimately benefit him or her, you might still qualify for aid.

However, that doesn't mean you should blow the money on your child -- or, even worse, neglect to save in the first place. You are absolutely correct that much of today's college aid is in the form of loans. If family savings keeps kids from having to start their lives in debt, they are way ahead (and so are you if you don't have to tap retirement funds).

Parents should never assume that financial aid will bail them out. Aid formulas often still require them to come up with thousands of dollars a year as their family contribution.

It always makes sense to save for college. If you think your kids might qualify for aid, keep the savings in your name. If your income is so high -- over $100,000 a year -- that they'll only qualify for loans, consider custodial accounts so that you can benefit from tax breaks.

To estimate how much aid you're likely to get, crunch the numbers at www.collegeboard.com or www.finaid.org.