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On money

Prepaid college savers to get break

By HELEN HUNTLEY
Published February 19, 2006

There's good news on the financial aid front for parents saving for their children's college educations.

The highlight for Floridians: Participants in the Florida Prepaid College Plan, the nation's most popular college savings plan, will no longer pay an extra penalty when they apply for financial aid.

Great news no matter where you live: Parents who made the mistake of saving money in their children's names have a way around the resulting financial aid penalties.

Both changes take effect July 1 under the deficit-reduction law President Bush signed this month.

Most college financial aid is based on need, calculated under a federal government formula that has treated prepaid plans like Florida's more harshly than other types of savings. A prepaid plan is classified as a "resource" like a scholarship, and every dollar taken out reduces financial need by a dollar.

Thanks to the new law, the plans will be treated the same as savings in a parent's name. That means no more than 5.64 percent of the account's value will be considered available for college expenses each year. The result: Prepaid participants will be eligible for more financial aid.

"This is a huge benefit for the student who is applying for financial aid and participates in the Florida Prepaid program," said Ted Hoepner, chairman of the board that governs Florida's plan.

The potential beneficiaries include more than 68,000 plan participants enrolled in college and thousands of others who hope to enroll in the future, including the 52,552 who signed up in the enrollment period that ended Jan. 31. (A new period will start in October.)

Savings held in the student's name, including custodial accounts for minors, have been treated better than the prepaid plan but worse than savings in a parent's name. The financial aid formula considers 35 percent of a student's money available for college expenses each year.

The new law now allows that money be placed in a custodial account with a 529 college savings plan and treated the same as parental savings, with no more than 5.64 percent considered available for college expenses. The result: Students will be eligible for more financial aid.

For best results, the transfer to a 529 plan should occur before Jan. 1 of the student's junior year in high school. All 529 savings plans take only cash contributions, so if a student has stocks or mutual funds, they'll have to be sold to make a transfer. You don't want to do that just before college because the sale will generate capital gains that count as income, also a consideration in financial aid awards.

If transferring money seems like too much trouble, you'll still get a break. Starting with the 2007-08 school year, assets in the student's name will be assessed at 20 percent instead of 35 percent.

You might think qualifying for more financial aid would be a reason to save less, but it isn't. The aid your child gets is likely to include loans, and their cost is going up. Interest rates are increasing for parent and student loans under other sections of the deficit-reduction bill. In July, the rate on Stafford loans will increase from 5.3 to 6.8 percent and the rate on parents' PLUS loans will increase from 6.1 to 8.5 percent.

By saving more, you ca n reduce the need to borrow.

My husband died in 1997. How can I get savings bonds that were issued in both our names changed to my name and another beneficiary? I don't want to cash them in, as they are making money.

To have bonds reissued after a joint owner's death, fill out Form PD F 4000, get your signature certified and mail in the bonds, the form and a copy of the joint owner's death certificate. Copies of this form and answers to questions about savings bonds are available at www.treasurydirect.gov I used the "search" function on the Web site to find what you were looking for.

Those who don't have Internet access can call toll-free 1-800-245-280 4 to request a copy of the form.

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 hhuntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified February 17, 2006, 21:22:02]