Loophole Could Increases Eligibility for Financial Aid

By KARIN FISCHER


Under a little-noticed loophole in a new federal law, money set aside in
college-savings plans will not be counted in determining a dependent
student's eligibility for need-based financial aid if the account is in the
student's name, according to guidance released last week by the U.S.
Department of Education.

The loophole -- created by Congress in February when it passed
deficit-reduction legislation -- is reflected in a proposed revision
of the Free Application for Federal Student Aid, or Fafsa, which the
U.S. Department of Education published last Tuesday in the Federal Register.

The Fafsa is the standard application form that the federal government,
state governments, and most colleges use to determine a student's
eligibility for financial aid.

In the draft revision of the Fafsa, instructions direct applicants to report
the value of assets in college-savings plans and other education accounts
owned by their parents. But, the instructions state, "Do not report the value
of these accounts if the student is the owner."

It is unclear how many families the change could affect, said Joseph F. Hurley,
an accountant who tracks the plans for his Web site, Savingforcollege.com.
While New York State does allow parents to act as custodian of a dependent
student's plan, many states do not permit accounts to be opened in a minor's name.

There is also some confusion about whether Congress meant to create the
potential loophole or whether it arose from a legislative drafting error.
"I'm not sure how many people who are rushing out to open plans because
there is some skepticism that's what was intended," Mr. Hurley said. Still,
he added, "on an individual basis, this certainly could be a substantial benefit."

Under previous law, money placed in college-savings plans, even under a
student's name, could shrink a student's financial-aid award, although the
size of the reduction depended on factors such as family income and the
cost of attending a particular institution.

The Education Department is seeking comment on the revised Fafsa through August 7.

Investors have opened about 8.6-million college-savings accounts, with a
total value of more than $89.46-billion, according to the College Savings
Plan Network, the association that represents state-run college-savings
plans. All 50 states and Washington, D.C., now offer the plans.