Maximizing College Financial Aid

[stephenandrew]

Yesterday's Wall Street Journal ran an article on how upper middle class families who normally would not be elligible for any financial based aid for college might be able to rearrange their finances a bit to enhance the chances that they get some "free" money. The complete aritcle is here: Gaming the Financial-Aid System - WSJ.com

The part that I found most interesting/confusing was this:

Some families may want to consider margin loans, passbook loans (which use savings accounts as collateral) or a home-equity loan to help pay for college since such loans reduce net assets in the aid formula, says Mr. Chany. If, for example, you have a $20,000 stock portfolio and a $5,000 margin loan and have no other investments to report, you'd report $15,000 as the figure for your assets on the Fasfa. A major drawback: If the stock market declines drastically, you may be asked to put up additional stock as collateral or pay back part of the margin loan.

At first, this made sense to me, but after thinking about it a bit, I did not completely understand how this would work. If you took out a HELOC to make it appear that you have less equity in your house (or a margin loan in the case of stock), would you not still have to report the cash you received from the HELOC (or margin loan) as an asset on the Fafsa? This asset (cash) would offest the decline in your home or equity portfolio, would it not? Seems to me the change would be a zero net change.

 

[LOL!]

I read the article and it was totally worthless. Ms. Kim is usually a better journalist than this article reveals.

I think the idea is that you do not want to sell your taxable investments to pay for college if you are going to fill out the FAFSA again. The reason is that your income tax return will show a higher annual income then and income counts more against you than cash or investments in the bank.

So anytime you can borrow instead of having more income may be better. Sure, your net worth does not change, but your tax return changes which affects what happens on the FAFSA the next time you fill it out.

Note that if you took out the loan and used it to pay for college, then you would not have that cash in your hands when you filled out the FAFSA, so you would not report it on the FAFSA.

 

[FANOFJESUS]

You can take a margin loan and cut your stock or bond holdings in half. The only thing is you can't put that money in a bank or it would be counted again. I did not understand the HELOC I thought home equity and retirement funds were not counted.

 

[stephenandrew]

You can take a margin loan and cut your stock or bond holdings in half. The only thing is you can't put that money in a bank or it would be counted again.

So where would you put it? In the mattress? Safe Deposit Box?

 

[FANOFJESUS]

So where would you put it? In the mattress? Safe Deposit Box?

Thats a good question.

 

[LOL!]

So where would you put it? In the mattress? Safe Deposit Box?

As I wrote previously, you would pay it to the college.

 

[RunningBum]

It would be safer to do some tax loss harvesting, so you could get cash without income, and not have the risk of a margin call. Considering that the market has been flat overall for the past 10 years, I'd think a lot of people could sell selected stocks or funds without generating income.

 

[LOL!]

Here's something suggested to us: Pay in advance for all 4 years of tuition. That way you will not get hit up with the price increases which exceed inflation. You probably cannot earn that amount of money in your 529 plan anyways.

I guess you should hold back some money so that you can get the tax credits each year for educational expenses.

 

[RunningBum]

I didn't know that was an option, but what happens if your kid transfers or drops out?

 

[stephenandrew]

Here's something suggested to us: Pay in advance for all 4 years of tuition. That way you will not get hit up with the price increases which exceed inflation. You probably cannot earn that amount of money in your 529 plan anyways.

I guess you should hold back some money so that you can get the tax credits each year for educational expenses.

Of all the schools my son applied to, only one offered this alternative. I thought it was a good idea too.

 

[stephenandrew]

As I wrote previously, you would pay it to the college.

I would think if the college has the money, they would treat that as an asset for the purpose of determining how much financial aid you would receive. I can't imagine they would be so stupid as to disregard the money you have given them in determining how much aid they will give you. Take an extrem case--you mortgage your house for $200K, pre pay 4 years of tuition. I don't think you will be elligible for any need based aid.

 

[LOL!]

I think you misunderstood.

Scenario A:
Year 0 (sr year of HS): Fill out the FAFSA for freshman year.
Year 1 (Fr year of College): Pay for school from HELOC or 401(k) loan. Note no new income on your tax return. Fill out the FAFSA for sophomore year. Since your income is about the same, same aid for sophomore year.

Scenario B:
Year 0 (sr year of HS): Fill out the FAFSA for freshman year.
Year 1 (Fr year of College): Pay for school by selling funds at huge capital gain. Note lots of new income on your tax return. Fill out the FAFSA for sophomore year. Since your income is higher, less aid for sophomore year.

This is also the reason they say not to use your IRA to pay for college. The money withdrawn from the IRA is penalty-free, but you still have to pay income tax on it and it shows up on your Form 1040 that you submit the next year with your financial aid request.

Of course, if Scenario A has you with no financial aid to begin with, then Scenario B is not going to hurt you anyways.

 

[NW-Bound]

I never heard of FAFSA, and never filled out any financial form for my 2 children. I figured that we would not qualify for anything, so why bother? My children also did not work hard enough to get any scholarship, so I paid for all their schooling costs at a state U.

I did need financial aid for my schooling, and appreciated the help that I got.

 

[LOL!]

No need to bother if you are committed to paying for all education costs. But suppose you want your child to take a out a loan to have some of their own skin in the game. Even if you are a multimillionaire, they can still get a loan, but their parents will need to submit a FAFSA if they want the kid to be eligible for one of those government loans.

 

[NW-Bound]

Good point! For my children, getting cut-off and having to w*rk at menial jobs to make a living compared to what they have now scares them enough to try their best in school.

Seems to work so far One graduated, got a decent job and flew the coop. One left to go. Then, we can dedicate the rest of our lives to leisure.

Oops. Forgot about aging parents...

 

[FANOFJESUS]

I think you misunderstood.

Scenario A:
Year 0 (sr year of HS): Fill out the FAFSA for freshman year.
Year 1 (Fr year of College): Pay for school from HELOC or 401(k) loan. Note no new income on your tax return. Fill out the FAFSA for sophomore year. Since your income is about the same, same aid for sophomore year.

Scenario B:
Year 0 (sr year of HS): Fill out the FAFSA for freshman year.
Year 1 (Fr year of College): Pay for school by selling funds at huge capital gain. Note lots of new income on your tax return. Fill out the FAFSA for sophomore year. Since your income is higher, less aid for sophomore year.

This is also the reason they say not to use your IRA to pay for college. The money withdrawn from the IRA is penalty-free, but you still have to pay income tax on it and it shows up on your Form 1040 that you submit the next year with your financial aid request.

Of course, if Scenario A has you with no financial aid to begin with, then Scenario B is not going to hurt you anyways.

This works great if you have very little money other than the home or 401k.

 

[Nords]

Here's a handy hint for the FAFSA and the college PROFILE financial-aid worksheets:

The financial data fields only handle six-digit numbers. If you're trying to enter a seven-figure number anywhere other than the block that says "phone", then you're not gonna get any financial aid...

I completed both just to make sure we were on record for whatever financial aid (including merit scholarships and work-study as well as needs-based grants) was being handed out. If our kid decides that NROTC isn't what she had in mind after all, then I don't want to be scrambling to catch up.

 

[LOL!]

The instructions are pretty clear that you enter 999999 even if you have a higher number. But your EFC can be higher. One school added my daughter's UGMA account in its entirety to 999999 to come up with the EFC. They awarded her a loan.

We went to our HS "award night" which the guidance counselor uses as a "brag night" where everyone with any kind of award gets recognized. The kids got something like $8 million in money although some was inflated notoriously because the service academies say admittance is worth over $400K. They must be including your salary for 4 years after your degree as well.

It is pretty clear that to get merit aid, you need to attend a 2nd-tier university or non-flagship state college. A few folks got money from top 20 schools, but they were the top 3 folks in a class of about 700 and well deserving. Folks in our ZIP code generally do not qualify for financial aid.

 

[jIMOh]

So where would you put it? In the mattress? Safe Deposit Box?

If child is a senior in HS, you have have not taken the loan yet, and its the tax return when your child was a junior which is being used then anyway...

however if child was a freshman and you took the loan, then paid tuition with loan proceeds for the sophomore year, the money is off the table by the time tax return time comes around when filing fafsa when child is a sophomore (for their junior year).

 

[NeverBored]

FAFSA and I are old friends. We have two daughters in excellent, small, private colleges. It's expensive. Both have academic scholarships, and amazingly, qualified for subsidized Stafford loans. One also has an athletic scholarship. It's worth filing FAFSA, even if you doubt you qualify for anything. There's a really excellent recap of how to maximize financial aid eligibility at the finaid website:

FinAid | Financial Aid Applications | Maximizing Your Aid Eligibility

There's federal aid, and institutional aid, and they are sometimes figured differently. Federal aid does not use primary residence equity, so using a HELOC doesn't help with that. But institutional aid can consider home equity -- it's up to the institution. One of our daughters was given an interest-free institutional loan and a small grant from the institution.

The website says it better than I can: [FONT=ARIAL, HELVETICA][FONT=ARIAL, HELVETICA][FONT=ARIAL, HELVETICA]

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The Federal need analysis methodology does not consider the equity in the family's primary residence. So to maximize your eligibility for Federal aid, you could use your cash and other included assets to prepay part of your mortgage. Many private colleges and universities, however, do count your home as an asset when allocating institutional funds. If so, it may be worthwhile to get a home equity loan to provide funds for your children's education. Not only are the interest payments tax deductible, but the loan reduces your assets.

I think one reason we've qualified for some financial aid (subsidized loans and some institutional aid) is that we are older parents, and have two in college at the same time (another plus for twins). Also, a good chunk of our investments are retirement accounts, and aren't considered in the formulas. We have income property, which I thought would knock us off the chart, but it didn't.

We're still paying a huge chunk of change (two more years!) but so far it's worth it. Both girls work really hard and have over 3.5 gpa's. They're responsible for their own spending money, clothes, etc, and have Stafford loans they will pay back. One of them just returned from a missons/service trip to Uganda, after a year of fundraising. We've done this with one older daughter, and she's on her own and a joy. She borrowed $5000 from us while in college to buy a car, and paid it back with interest before she graduated.

Why am I telling you this? I just read the thread on wedding expenses.....

 

[Nords]

... although some was inflated notoriously because the service academies say admittance is worth over $400K. They must be including your salary for 4 years after your degree as well.

Heck, in 1982 it was supposed to be "only" $250K, and adjusted for inflation that works out to $565K. Those who believe the CPI is understated might figure reality to be closer to $750K. Then there's the "hedonic adjustments" like air-conditioning the midshipman dorm.

Of course if we're only paying $400K for an education worth $565K then we're getting an incredible bargain for our tax dollars at work.

I haven't seen a spreadsheet lately, but I'm pretty sure that the service-academy administrations add up their annual expenses and divide by the number of students. That doesn't even begin to count the costs of "professional equipment" like fuel for the yard patrol craft, sailing equipment, firearms, and ammunition...