Annuity

Paying for College
1

<p>A friend of mine's daughter, who attends a parochial high school, is presently applying to colleges. If a parent is interested, the high school college counselor recommends a fee based consultant to assist in negotiating the financial aid maze. The consultant recommended that my friend purchase an annuity <a href="it%20would%20not%20be%20in%20a%20retirement%20account">i</a>* to shelter funds from being considered in the aid formula. My first thought was the consultant was attempting to garner a substantial commission, but I learned he doesn't sell investment products.</p>

<p>I don't have any experience with applying for financial aid, still.... I don't understand why an annuity wouldn't be considered in the FAFSA/CSS formula. I'd appreciate any advice or opinions.</p>

2

<p>An annuity is a type of private retirement fund that will not be counted as an investment for the FAFSA. Some institutions that use the CSS Profile will look at all retirement accounts (including annuities), but some won’t. If a family has a lot of cash sitting in other kinds of accounts and that cash is intended for retirement rather than for other purposes, it can make sense to purchase an annuity all at once rather than shifting smaller amounts into IRA, 401(k), 403(c), etc. over the course of several years.</p>

<p>Annuities are tricky investments with their own advantages and risks, so they certainly aren’t for everyone. They should be part of a family’s overall long-term financial planning rather than just a short-term dodge for the FAFSA. The FAFSA EFC is much more dependent on income than it is on investments. Print out the formula and work through it on paper to see how various scenarios play out for your family. <a href=“http://www.ifap.ed.gov/efcformulaguide/attachments/082511EFCFormulaGuide1213.pdf[/url]”>http://www.ifap.ed.gov/efcformulaguide/attachments/082511EFCFormulaGuide1213.pdf&lt;/a&gt;&lt;/p&gt;

<p>Very few colleges and universities will meet a family’s full need as defined by the FAFSA. Most often there will be a significant gap between the aid offered, and the family’s need. It may make more sense to leave the money in a place where it can be accessed to help pay for college, than to tie it up in an annuity. One question to ask a financial advisor would be how easy it is to take out more money from the annuity if it is needed.</p>

3

<p>Re: an annuity…this should be done for RETIREMENT planning, not for sheltering money for financial aid purposes. I would suggest that the family work with their RETIREMENT financial planner if they are considering an annuity, not a college financial aid “consultant”. </p>

<p>As noted by Happymom, annuities are tricky and they are NOT the right thing for all folks. I absolutely would NOT take the advice of a college financial aid planner of any type when considering what to do with my retirement funds.</p>

<p>Also, I’m not an expert here…but if the money is currently IN retirement accounts, there is NO benefit to moving them to an annuity for financial aid purposes. If they are currently in regular savings, I believe there is a LIMIT on the amount you can actually put in a retirement annuity per year. </p>

<p>The other thing to consider…need based financial aid is LARGELY based on income. The family might want to run an online financial aid calculator or the net price calculator on the school website using both scenerios…without the annuity, and with…to see IF there really is a significant difference. They may find that all this thought doesn’t make any difference at all due to their income.</p>

<p>Also, if the money is in a savings or such…it would be a liquid asset available to the family. If put in an annuity, there ARE restrictions on when the family can tap into these funds. Something else to consider.</p>

<p>For FAFSA purposes, assets are tapped at 5.6% approximately and that is AFTER the asset protection amount.</p>

4

<p>Happymon,Thumper…Thank you very much for your informative and helpful replies.</p>