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On money

Tips to help send kids to college

Published November 27, 2005

One thing I've learned writing about money over the years is that lots of grandparents want their grandchildren to go to college and are willing to help make that happen.

However, many unwittingly reduce their grandchildren's chances of receiving financial aid by putting money in the students' names. The standard financial aid formula expects students to spend 35 percent of their personal savings on college costs each year. That amount is subtracted from the students' financial need, resulting in a smaller financial aid award.

Money held in a gift-to-minors account under the child's Social Security number is considered the child's money in these calculations.

So what's a grandparent to do?

Option 1: Keep the money in your name.

If college is in the near future for your grandchild, consider hanging on to the money, then using it to pay expenses directly. Checks written to the college or to a health care provider don't count toward the annual exemption from gift tax rules ($12,000 in 2006.) You also could write checks for rent or give the child cash for books each semester.

If you take this approach, use a bank or brokerage account that names your child as the payable-on-death beneficiary. That way if something happens to you, the child will get the money.

If college is many years in the future, a 529 savings plan makes sense. Under current tax rules, withdrawals are tax-free if the money is used for qualifying educational expenses. You can be the owner of the account with the child as beneficiary. If your beneficiary doesn't go to college, you can use the money for another grandchild.

Option 2: Put the money in the name of a parent.

The parents' assets will be considered in calculating financial aid, but a much smaller percentage (no more than 5.65 percent) is considered available for college spending each year.

A 529 savings plan in the parent's name is a good choice and so are savings bonds, which can be cashed tax-free if used to pay college tuition (income limits apply).

If you are interested in a 529 plan, start by checking out Florida's ( or the plan for the state where your grandchild lives. Information about plans is available at

Option 3: Give it to the child anyway.

Middle-income children attending state colleges and universities with Florida Bright Futures Scholarships may not qualify for much, if any, need-based financial aid. Most of the aid they do get will be loans.

That's why even though the Florida Prepaid College Plan reduces financial need and thus financial aid, it can be a good choice for many families.

Also remember that giving money away within three years of applying for Medicaid creates a period of ineligibility. That's important if you might need nursing home care and don't have other means to pay for it.

I am a college student and have made about $9,000 working part time this year. Taxes are not taken out of my check so I know I will owe money at the end of the year. My parents claim me as a dependent. Does that mean I will owe taxes on all $9,000?

If they claim you as a dependent, you will owe income taxes on your earnings above $5,150. If they don't claim you, you will owe taxes on your income above $8,450. The difference is the $3,300 personal exemption, which they get if they claim you. Your tax rate will be 10 percent.

It probably is a good idea for both you and your parents to analyze your tax returns to see who gets the most benefit from claiming you as a dependent. Don't forget to check your eligibility for the various education credits and deductions.

At your income level, your parents cannot claim you unless you are under 24. If you are between 19 and 24, you must be a full-time student.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified November 23, 2005, 18:43:02]

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