College Savings Accounts: Where to Stash Grandma's Check?

Last Updated Oct 26, 2010 2:51 PM EDT

My younger daughter just passed her first birthday and her grandmother wrote her a very generous check. Grandma wants the money to go toward college so I thought I would invest it in a 529 savings plan. But I'm not sure who should open the account. So I called Joe Hurley, the founder of Savingforcollege.com, for some advice.

I have two options, according to Hurley. The first one is that my mother-in-law can open up a 529 college-savings plan of her own and make my daughter the beneficiary. The upside here is that Grandma maintains control and she can later dip into the account if she falls on hard times.

There is a downside, however, with this strategy. During my daughter's sophomore year of college, she could qualify for significantly less financial aid since the money used from this account will be viewed as income, warns Hurley.

The second option -- and in Hurley's opinion the better one -- is for me to open up a custodial 529 account for my daughter and deposit grandma's check there. Although the funds will technically be my daughter's, they will get treated by the financial aid office as if they are my mine. That means she may qualify for more financial help from her future school since just 5.64% of the money is expected to go toward my family's contribution for tuition, says Hurley.

Prior to a somewhat recent change in the way financial aid is calculated, all custodial accounts used to be treated as the child's asset. Children were then expected to contribute 20% of their money toward tuition. (UGMA/UTMA custodial accounts are still accounted for in this way, making them a somewhat less advantageous way to save for education.)

I next asked Hurley what I should do with my own contributions. It seems so convenient to have just one college savings plan for each child. But placing my own money in a custodial 529 would be a mistake, he says. It would be better for me to open a new account that I own. This would allow me to maintain control of the cash and have the freedom to change the beneficiary at any time. I could also decide to keep the money for myself if my daughter decides not to pursue a university degree.

And what happens if my daughter's other grandparents want to give her a gift. Hurley recommends they write me a check and I deposit it into my 529 plan. Again, this is so I have control of the funds and can make sure they are used for her education. Otherwise, there's always the chance she could cash out her college savings plan when she's officially an adult.

What do you do with gifts from family for your children?

Stacey Bradford is the author of The Wall Street Journal Financial Guidebook for New Parents.
USC image courtesy of Flickr, CC 2.0.
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