Need-Based Financial Aid Distorts College Savings . .

July 2004
Journal of Financial Planning;Jul2004, Vol. 17 Issue 7, p20
Academic Journal
This article reports that financial aid formulas and taxes distort how U.S. families save for college, and in some cases savings can make them worse off than if they had not saved at all, according to the thesis of a National Bureau of Economic Research working paper by Susan Dynarski. Dynarski calculated how much financial aid was lost for each dollar saved in various savings vehicles. The findings of Dynarski include that 15 cents for each dollar saved in a 529 plan, 26 to 39 cents in an individual retirement account, and 40 cents in a mutual fund, $1.24 for each dollar held in a Uniform Transfer to Minors Act account. Dynarski also calculated that Coverdell education savings accounts lost $1.22 per dollar saved, which was before the federal government ruled that ESA would receive the same treatment as 529 plans when determining federal student aid. In a statement issued by Dynarski, arbitrary tax variations undermine the goals of need-based aid, and that families with identical financial positions receive very different levels of aid, depending on whether they are savvy enough to steer their savings toward the right vehicles.


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