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Could you explain why a trust fund is a net minus for most people, and how college financial aid is affected by it?

whafro 14y ago
At many of the top colleges and universities in the US, the institution is able to meet 100% of the "demonstrated financial need" of the family. At several schools, all of the provided financial aid comes in the form of grants, which is basically free money. At all of these schools, while the tuition price tag might be $50,000 per year or more, relatively few families actually have to pay this sticker price. At my alma mater, Bowdoin, the overall cost is around $54k, but the average financial aid package (according to the College Board) is $41k, leaving the average Bowdoin student on the hook for only $13k a year. If you're a family that otherwise would qualify for a large amount of financial aid, but you've saved up into a trust or other savings plan for the purpose of funding your child's education, you'll lose this free money. The institution will count this amount against your demonstrated financial need. Some families with means are able to hide away these funds, and still get significant financial aid from a school like Bowdoin, but most families don't have the resources or savvy to do so. Of course, if we're talking about institutions that don't have such strong financial aid programs – which is the vast majority – you probably want that savings. Deciding to save for your child's education is, statistically, usually a good decision. If your child ends up going to one of the above, though, it can be a costly one.
- pdsull 14y ago
  But it also depends on how the trust is created. I have no idea how TrustEgg establishes the trusts, but many people set up trust funds for their children - but name the child as an alternate beneficiary, after themselves. So, if I set up a fund for my child - the trust fund would be mine until I died. Assuming I was still alive while my kid was at college, the trust fund would be mine and not hers.
  - Kadrith 14y ago
    From what I recall the parents assets can be used, up to a certain percentage, to determine what the child is eligible for. One way around this is to use a Roth IRA, since it allows you to take money out for college without a penalty and would not be used to determine FAFSA.
danielweber 14y ago
Most private colleges charge the maximum you can possibly afford after going into significant debt. The "maximum you can possibly afford" goes up on almost a 1:1 basis for every dollar in the child's name. You might as well just write the check directly to the college as a donation. At least you can deduct it as a charitable donation that way (assuming it's a qualified non-profit blah blah).
Bricejm 14y ago
Jeff - Founder/CEO - A UTMA is in the child's name, so 20% of the assets are considered for financial aid. http://www.axa-equitable.com/plan/education/can-UGMA-UTMA-account-reduce-financial-aid.html http://www.axa-equitable.com/plan/education/can-UGMA-UTMA-ac...
- danielweber 14y ago
  It reduces your financial aid package 20% each year.
jellicle 14y ago
The formula for financial aid counts assets in the child's name as being highly available to pay college costs, while parental assets are much less so. Family A: parents have $10K, child has nothing Family B: child has $10K, parents have nothing Family B will be calculated to have more money available to spend on college (OBVIOUSLY the child should pay for college out of his own assets first...) and will get less financial aid. This will be true 18 years from now even if the system is tweaked slightly in the meantime.
- Daniel_Newby 14y ago
  The average American kid has an IQ of 100 and will attend a state subsidized community college, trade school, etc. They need to minimize loan interest and time spent working their way through school with menial jobs, not worrying about the exact financial aid efficiency of Harvard.

At many of the top colleges and universities in the US, the institution is able to meet 100% of the "demonstrated financial need" of the family. At several schools, all of the provided financial aid comes in the form of grants, which is basically free money. At all of these schools, while the tuition price tag might be $50,000 per year or more, relatively few families actually have to pay this sticker price. At my alma mater, Bowdoin, the overall cost is around $54k, but the average financial aid package (according to the College Board) is $41k, leaving the average Bowdoin student on the hook for only $13k a year. If you're a family that otherwise would qualify for a large amount of financial aid, but you've saved up into a trust or other savings plan for the purpose of funding your child's education, you'll lose this free money. The institution will count this amount against your demonstrated financial need. Some families with means are able to hide away these funds, and still get significant financial aid from a school like Bowdoin, but most families don't have the resources or savvy to do so. Of course, if we're talking about institutions that don't have such strong financial aid programs – which is the vast majority – you probably want that savings. Deciding to save for your child's education is, statistically, usually a good decision. If your child ends up going to one of the above, though, it can be a costly one.

pdsull 14y ago
But it also depends on how the trust is created. I have no idea how TrustEgg establishes the trusts, but many people set up trust funds for their children - but name the child as an alternate beneficiary, after themselves. So, if I set up a fund for my child - the trust fund would be mine until I died. Assuming I was still alive while my kid was at college, the trust fund would be mine and not hers.
- Kadrith 14y ago
  From what I recall the parents assets can be used, up to a certain percentage, to determine what the child is eligible for. One way around this is to use a Roth IRA, since it allows you to take money out for college without a penalty and would not be used to determine FAFSA.

danielweber 14y ago

Most private colleges charge the maximum you can possibly afford after going into significant debt. The "maximum you can possibly afford" goes up on almost a 1:1 basis for every dollar in the child's name. You might as well just write the check directly to the college as a donation. At least you can deduct it as a charitable donation that way (assuming it's a qualified non-profit blah blah).

Bricejm 14y ago

Jeff - Founder/CEO - A UTMA is in the child's name, so 20% of the assets are considered for financial aid. http://www.axa-equitable.com/plan/education/can-UGMA-UTMA-account-reduce-financial-aid.html http://www.axa-equitable.com/plan/education/can-UGMA-UTMA-ac...

danielweber 14y ago
It reduces your financial aid package 20% each year.

jellicle 14y ago

The formula for financial aid counts assets in the child's name as being highly available to pay college costs, while parental assets are much less so. Family A: parents have $10K, child has nothing Family B: child has $10K, parents have nothing Family B will be calculated to have more money available to spend on college (OBVIOUSLY the child should pay for college out of his own assets first...) and will get less financial aid. This will be true 18 years from now even if the system is tweaked slightly in the meantime.

Daniel_Newby 14y ago
The average American kid has an IQ of 100 and will attend a state subsidized community college, trade school, etc. They need to minimize loan interest and time spent working their way through school with menial jobs, not worrying about the exact financial aid efficiency of Harvard.