Word of Advice if You're Saving for Kids' College Educations

Do NOT invest in custodial accounts (UTMA/UGMA)! These are accounts that are in your child's name, with his/her social security number, and which list you as the custodian until your child reaches 18 (21 in some states).

Years ago, my parents, with the very best of intentions, set up custodial college accounts for our kids. It seemed to be the right way to go at the time because the account was taxed at the kid's rate, not the parents' -- or not taxed at all in some cases. We tried to contribute to those accounts on a regular basis and, although each kid's account will only pay for a year (at best) of the average university education, we felt good knowing that we'd at least done something toward helping them pay for college.

We did something, all right. We set up their college savings in a way that will hugely hinder their ability to qualify for financial aid -- financial aid that is desperately needed, not only because I'm unemployed, but because we'll have three kids in college next year! (Four including Elisabeth, but she's pretty much on her own for grad school.)

Because the accounts are in the kids' names, and because the FAFSA (Free Application for Federal Student Aid) looks at the student's money before the parents' money and requires the student to contribute a higher percentage of his or her savings than the parent is required to contribute (30% or more of student savings vs. 6% of parent savings), we all... well, we're kinda screwed.

We went to a seminar about paying for college last week at the kids' high school, which is where we discovered this jaw-dropping news. Afterwards I talked to the presenter, who was from a financial consulting company, and she suggested that I "clean up" those accounts. Hmmmm... I wonder what that means.

Of course I won't do anything illegal. Duh. But geeeze -- now I feel like someone just slipped me a message from the folds of a trenchcoat! All we want to do is help our kids pay for college, f'rgoodnesssake, and now I need to "clean up" the money we saved for them for that express purpose? Since they're all 18 and the money is now officially theirs, I guess they could "give" it to us and we put it into our account. Then it's ours and falls under the 6% rule, right?

I am losing sleep over this big time and I want to do the right thing -- for our kids as well as in the eyes of the government. It's money we put aside for them for their college educations, so why does it feel like if we touch it to try to protect their ability to pay for college, we're doing something bad?!

Irony of ironies, I recently landed a freelance writing gig in which I write about exactly this topic. Fortunately, what the company (an online college financing company) wants are monthly doses of honest, real stories from honest, real people who are struggling to put their kids through college. I have a feeling this month's contribution will be a doozy!