Be glad daughter doesn't need college financial aid
By HELEN HUNTLEY
© St. Petersburg Times, published February 4, 2001
Q. Our daughter will start college this summer at the University of Florida. We have saved $60,000 for her education in stocks, bonds and mutual funds in an account under her name. It has been recommended that we take out school loans for the next four years, and when the loans come due, pay them off in full to avoid interest payments.
Are we eligible to receive college loans if the account is in the student's name? Do you recommend this idea as a money-saving/moneymaking strategy? How will we be affected by capital gains taxes? I think we are being penalized for saving early for our daughter's education. It is so frustrating, especially when we see others who have not saved anything for their children breeze through the financial system.
A. Your savings will disqualify your daughter for need-based financial aid at any Florida public university, where the cost of attendance is about $11,000 a year. From a financial aid perspective, your daughter already has more than enough money to pay for her education.
And that's good news, not bad. Not only do you have enough money to pay for a college education, you also have a daughter who is bright and hard working enough to be accepted at UF. You also can be glad UF's tuition is about $20,000 a year less than many of the alternative choices your daughter might have found attractive.
Unless you would have two or more children in college at the same time, chances are your daughter would not have qualified for much aid at UF even if you had not saved a dime in her name. If you are connected to the Internet, you can get a better understanding of how this works by going to http://www.finaid.org and checking out the financial aid estimation form. This will tell you what your expected family contribution would be under various scenarios. You may find you would have a very large expected contribution based on income alone.
Even wealthy parents can borrow money for education with a Parent Loan for Undergraduate Students. But you will be charged interest (at a variable rate capped at 9 percent) while your daughter is in college.
The only reason to take out loans and repay them later is that you think your daughter's investments will earn more than the loan interest. This is a higher-risk strategy than I would recommend. A more commonly recommended approach is to begin selling stocks and moving into more conservative investments as a child approaches college age.
When you do sell the investments, your daughter will have to pay capital gains tax at her rate.
Middle- to upper-income families who have saved nothing do not "breeze" through the system as easily as you think. It is true that people with no savings or with savings only in a parent's name fare better in financial aid formulas. But aside from merit scholarships, the financial aid they get is mostly loans that have to be repaid. Many students also need other sources of money because their expenses are higher than the financial aid calculations anticipate. And often these expenses go on for more years than their parents had in mind.
If your daughter is able to graduate from UF debt-free, your whole family will have a right to be proud of that accomplishment.
Q. I sold some shares of stock last year but don't know how to figure out my tax basis. Tey were a spinoff from AT&T shares, which I bought many years ago.
A. The IRS says to make a good-faith attempt to calculate your tax basis. Because this is one of the most commonly asked tax questions, your tax preparer may be able to help. For the lowdown on historical stock prices, splits and spinoffs, check out AT&T Corp.'s Web site (http://www.att.com/ir/si). You can find tax basis worksheets under "shareowner services." Or get a copy of Charles Carlson's report, the AT&T Tax Wizard, from Horizon Publishing for $14.95 if you order by telephone at (800) 463-6596 or $9.95 if you order online (http://www.atttaxwizard.com).
Online money map
Thinking about a Roth IRA? Visit Tax Guide for Investors (http://www.fairmark.com), click on "tax guides" and then "Roth IRA." Or click on another topic that sounds intriguing.
- 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 Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or to firstname.lastname@example.org by e-mail.
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