529 Accounts Go to the Head of the Class
Changes in tax law give the savings plans a boost
By law, a custodial account belongs to the child, so having large amounts of savings in an UGMA or UTMA is detrimental for qualifying for aid. Meanwhile, 529 assets are not considered student money for financial-aid purposes, according to recent federal rulings.
If you've already started saving through an UGMA or UTMA, don't worry. Parents can roll over these accounts into a so-called custodial 529. While the money will still technically belong to the child, the assets will not be counted as student assets for aid purposes, even though the account maintains custodial status, the federal government recently said.
What about prepaid tuition plans, which allow parents to purchase units of future education at today's prices?
Earlier this year, the government gave these college savings vehicles a big boost by improving their financial-aid status. Under the old rules, the value of a prepaid tuition plan would reduce a student's aid eligibility dollar for dollar. But starting in July, the government put prepaids on a level playing field with 529 savings plans. Both savings vehicles are now beneficial for qualifying for aid since they are not considered student assets.
Even if you intend to use a prepaid plan to save for school, though, you will still probably want to start a 529 savings plan, too. That's because prepaid plans are good only for covering tuition and fees. They don't typically cover room and board. And in recent years, room and board has become nearly as expensive as tuition at many schools.
The bottom line, no matter what type of college savings vehicle you now use, is that you probably need to consider opening a 529. "These recent changes," says Joe Hurley, president of Savingforcollege.com, "really made the 529 more attractive relative to all other college savings vehicles out there."