From Doug Aker: “A lot of talk these days about the new Education IRA’s. My question: Don’t these accounts suffer from the same problem as putting college savings in your child’s name, namely colleges view money in them as 100% directed towards college expenses and you wind up getting less in financial aid? I am beginning to think much of the new tax changes that are supposed to help parents with college expenses are going to wind up hurting them by putting more money in their pockets to spend on college and consequently less financial aid. The change that really scares me is the one that allows parents to withdraw money from traditional IRA’s for college expenses. It used to be that the parents’ retirement money was protected from financial aid calculations. But now, what’s to prevent colleges from forcing parents to withdraw money from their IRA’s to pay for college.”
Good questions. My guess is that funds in an Education IRA, but less likely in retirement IRAs, will have that effect you fear — though this is a judgment call the colleges will have to make. Nothing prevents colleges from considering whatever they want in their calculations. After all, providing financial aid is not a college’s legal obligation. (It’s interesting how people have come to assume that people should not save up for their own kids’ higher education, that they’re entitled to have it subsidized by someone else.)
But for most people, I think this is academic. It’s student loans (and the new higher-education tax breaks and HOPE Scholarships) that will provide the aid, not outright grants. And that part should be unaffected by what you’ve saved.
So save up!
Quote of the Day
Burn down your cities and leave our farms, and your cities will spring up again as if by magic; but destroy our farms and the grass will grow in the streets of every city in the country.~William Jennings Bryan
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