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The child is the beneficiary and technically the owner of an education savings account. Therefore, the parent or legal guardian establishes and controls the account and decides how the money in the account will be invested and spent.
In January 2004 the U.S. Department of Education clarified how education savings accounts are treated when determining a student’s eligibility for needs-based federal financial aid. These rules apply only to federal financial aid; states and colleges have their own rules.
The Department of Education stated that the value of an education savings account is now counted as an asset of the parent if the parent is the owner (according to the Department’s definition) of the account. That means the federal formula only counts up to 5.64% of parents’ assets when calculating financial aid need, rather than the 35% that is assessed on student assets.
The Department of Education also clarified that qualified distributions from education savings accounts are not counted as parent or student income in the determination of federal financial aid. Therefore, withdrawals for qualified education expenses from an education savings account do not reduce financial aid eligibility.
Although the Department of Education letter clarified the rules for now, as always, the rules are subject to change. Moreover, most financial aid is awarded in the form of loans, and non-needs based aid is available if you don’t qualify for needs-based aid.
Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.
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