Ask Terry Questions College Savings

College Savings

By Terry Savage on October 20, 2018 | College Savings / Student Loans

Hi Terry — We’ve been saving for their college since our kids were born in various accounts based on what made sense at the time. In chronological order, we have:

1)Coverdell ESA
2)Custodial Unif Trans Minor Act
4)Brokerage account in my name if any more is needed

My question is, what funds should I user 1st, 2nd, etc?


Terry Says

If you don’t have “enough” money, you will have to apply for financial aid. And money held in an UGMA account — in a custodial account — weighs 7x more heavily against the family in the financial aid formula! So use that money first and it won’t impact aid if needed for the last two years of college.
Money held in investments in your brokerage account will be subject to capital gains tax when the stocks are sold to pay for college. Those gains will increase your income and again will have some impact on any financial aid if needed. Of course, the sales decision is also impacted by market conditions.

A Coverdell has minimal impact on the financial aid formula, so you’ll have to decide whether to sell stocks and (hopefully) increase your reported income in the early years when you aren’t applying for aid — or postpone the sale to make more gains. It’s a tough call!

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