Federal guidelines are often unclear, sometimes innaccurate, on how to treat college-savings accounts.
College-savings expert Susan Bart answers advisors' questions on 529 plans and other education-planning matters. E-mail your questions to firstname.lastname@example.org.
A recent Congressional Research Report demonstrates that there are still ambiguities in the federal financial aid treatment of tax-advantaged techniques for saving for college.
The report, titled "Tax-Favored Higher Education Savings Benefits and Their Relationship to Traditional Federal Student Aid" and written by Linda Levine and Charmaine Mercer (July 28, 2006), further notes that student aid form instructions often are unclear and sometimes inaccurate. The report concludes that "families with similar financial and other characteristics can be treated in very different ways depending upon how they interpret the instructions they do receive, or how they act in the absence of guidance."
This column will review the sources of authoritative guidance on the financial aid treatment of 529 savings accounts, 529 prepaid plans, Coverdell education savings accounts, and certain U.S. savings bonds. It will then look at each technique separately to determine how the authoritative guidance suggests it should be treated for financial aid purposes. I'll then look at the 2006-2007 Federal Student Aid Handbook, Free Application for Federal Student Aid (FAFSA) form, and written instructions to determine the extent to which they may mislead or fail to instruct appropriately applicants and financial aid officers. Finally, this column will offer some suggestions for excluding a dependent student's assets from the financial aid analysis.
The authoritative guidance is the Higher Education Act, the Deficit Reduction Act of 2005, and several "Dear Colleague" letters from the Department of Education. The Federal Student Aid Handbook has not been revised since the Deficit Reduction Act and, therefore, is not authoritative as to matters addressed in the act.
Higher Education Act
The Higher Education Act is of very limited value in determining the financial aid treatment of tax-advantage education savings techniques. The Higher Education Act includes in "total income" "untaxed income and benefits." A number of specific items are included as "untaxed income and benefits," including "interest on tax-free bonds" and "any other untaxed income and benefits." The Higher Education Act defines "assets" as "cash on hand, including the amount in checking and savings accounts, time deposits, money market funds, trusts, stocks, bonds, other securities, mutual funds, tax shelters, and the net value of real estate, income-producing property and business and farm assets."
Deficit Reduction Act of 2005
The Deficit Reduction Act provides that a "qualified education benefit shall not be considered an asset of a student for purposes of section 475." A "qualified education benefit" is defined as a qualified tuition program (as defined in section 529(b)(1)(A) of the Internal Revenue Code), another prepaid tuition plan offered by a state, or a Coverdell education savings account.
Department of Education "Dear Colleague" Letters
GEN-04-02. "Dear Colleague" Letter 04-02 (Jan. 22, 2004), which addresses the treatment of Coverdell accounts, 529 plans and education savings bonds, states: