Dealing smartly with asset-based EFC

Paying for College
1

Hi there,

We have two kids, one starting college in 2022, the other in 2025 (so seven years of college, total). We make just enough to cover the income portion of our EFC (30K), but not more.

We thus need to use our assets to fund the portion of the EFC they will, themselves, contribute. (Which is fair.) The trick is that we need to do it soon, and we need to do it wisely, because starting in 2020 (our first base year) any assets we sell will appear as capital gains, and thus as income, and will hugely and artificially raise our EFC for the following years if we wait.

What amounts would you sell off and move to 529/retirement/cash, given these assets:

- 300K in SEP IRA (doesn't count, I guess).

- 75K home equity.

- 150K in stock. 15% capital gains to sell (almost 0 basis)

- Investment condo (details* below). 5K net rent. Equity 340K (market value minus loan payoff). Sale proceeds would be 240K after capital gains, depreciation recapture, and realtor.

I am feeling stupid, because I always thought of the condo as a retirement home, and the stock as a 529, but now that I’ve started to understand how financial aid works, and capital gains, too, I know this was crazily short-sighted, and I’m now looking to correct some missteps.

One additional piece of info is that as a self-employed person I have the capacity to open a solo 401K and contribute to it both as employer and employee. I could use assets to reach my (income-based) maximums of maybe 35K/year for each of 2018, 2019, 2020. And I guess a 529 plan has no max (??)

Thanks so much.

J

2

You currently have at least $565k in assets that are unprotected from financial aid consideration. Given this, I’m wondering if your income might be at a level that would make any financial gymnastics in pursuit of need-based aid a pointless exercise.

3

I’m not sure I understand the premise- what is the “income based portion” of your EFC? College’s aren’t going to tell you where the money is supposed to come from- their financial aid estimates will be based on a holistic payment strategy- part from your savings, part from current earnings, part from future earnings (loans).

And at a certain income level, it doesn’t matter. Most colleges do not meet full need anyway. Your EFC is a handy shortcut to figuring out if you qualify for Federal Aid (a Pell Grant) but since you don’t, it’s not a hugely useful number for a wide swath of colleges in America.

And the condo- you are netting 5k per year, or 5k per month?

And who is the “they”- your kids? They can contribute via summer earnings, and taking out the maximum federal loans. But again- the colleges are agnostic in terms of how you fund college. Nobody will tell you to sell your investment property. You just may realize that the cost/benefit of ownership is off and that selling it is a smart move.

But that’s not a financial aid move-- that’s just finance 101.

Is there a second working spouse in the picture and does that parent also have an IRA, assets?

Do you both have adequate life insurance?

I don’t mean to be nosy. But the people I meet in real life who have questions like yours tend to be wanting a graduate level seminar in “financing college” when they haven’t even taken Freshman year “finance for married folk with kids”. Don’t start moving assets around until you have covered off the basics. Life insurance for any dependents. A cash cushion equal to 6 months in case of an emergency. Disability insurance for the breadwinner(s).

4

I would sell assets when it makes sense, then appeal to the financial aid office that the extra income that year was a one-time windfall.

529 definitely does have a maximum, check the IRS website.

If you don’t have assets on hand to pay college bills, I would fund a 529 before the 401K. Otherwise you would have even more capital gains – for the assets you sell for the 401K plus the assets you sell to pay tuition.

As a business owner, your EFC will likely be much higher at schools that use the Profile. Have you run the EFC estimator on the College Board website? That is roughly the analog to the fafsa4caster for the Profile.

The best source of financial aid for the wealthy is merit aid. This means:

  1. Talking up the merit aid schools with your kids and not letting them become infatuated with big name schools that do not offer significant merit.
  2. Anything you invest in keeping GPA and test scores high (tutors, test prep, etc) can pay you back well if your child gets more merit aid.
5

I do think the OP is being smart at starting the education process before the base year. Many times people come here wanting advice and it’s really too late to do anything.

“Paying for College without Going Broke” is a really good book that describes everything that’s taken into account to compute financial aid. Every college is different, but there’s alot of common considerations. The book has strategies to maximize aid at various points of time (just before college, a few year before, a decade before, etc). I got it from the library.

https://www.amazon.com/s/ref=nb_sb_noss?url=search-alias%3Dstripbooks&field-keywords=%22Paying+for+College+without+Going+Broke%22

6

It’s good to look at this…but really…will you qualify for need based aid anyway?

Honestly, in my opinion, don’t sell of anything. Don’t dip into your retirement. Don’t sell your retirement condo. Don’t cash in your stocks.

Find affordable colleges within your budgeted price point. Have your kids look at schools where they will get guaranteed merit aid.

And one thing…as a self employed person…for many schools, some of the business deductions allowed by the IRS will be added back in as income for financial aid purposes.

If you can pay $30,000 each year for each kid…start by looking at your instate public universities. Look at what it takes to be in their honors college programs. Look for schools with merit awards that cover tuition…because your $30,000 a year will cover the remaining costs.

It sounds like you are looking at much more costly colleges than what YOU the parents can fund. Is that correct?

7

@jsb2000 - have you thought about taking loans out against your IRA and/or your rental property and then paying those loans off via asset sale once your income is not being scrutinized by schools each year (year 6)? If you really feel the capital gains income will hurt you for FA you might it a preferable approach. You’d need to calculate the interest you’d pay over the years in which your kids are in school and subtract out an estimated appreciation of your assets over that time to see the actual net impact on your finances.

8

Also if you’re wealthy enough to have these kinds of concerns, you could talk to a CPA.
You want someone who specializes in FAFSA and Profile issues, which often is not your regular tax accountant if you have one.

9

One factor on the condo is that rental property is not treated kindly by the Profile. Your depreciation will get added back into the income.

10

.

How do you nnow what your EFC is?

Do you realize that most schools will expect you to pay more than your EFC? Seriously, with your income/assets, most schools won’t care what your EFC is…they’ll still expect you to pay full cost. OOS publics will expect you to pay all costs.

Do you realize that most schools that give the best aid use CSS Profile?

Which schools do you see your children applying to? What is your home state?

Do you take any business deductions?

I agree with @thumper1 You should also be looking at schools that will give a lot of merit.

11

Don’t sell anything with an eye toward reducing your EFC. The 529s are treated the same way as any other investment assets: Assessed at only 5.64% of their value going toward meeting your annual EFC. Be glad you HAVE assets that can be used to fund college expenses – we are! Few people would choose to be poor and not have choices.

Your INCOME is what will mostly determine your EFC for any one year, with up to 47% of your last dollar potentially going to toward meeting your EFC. Some colleges will eyeball your retirement accounts/pension potential to get a better overall view of your financial strength.

But, if you do decide to unload any of your current assets, I’ll be happy to accept them from you and thereby increase our own EFC.

12

Thank you all so much for your ideas and I look forward to reading each one carefully tonight.

To blossom: by “they” I mean the assets… and by 5K I mean per year, not per month.

The college board calculator says, based on income and assets:

  • our EFC would be 28K if our assets disappeared
  • our EFC is 51K, given our assets.

These EFC’s make sense to me, as does the idea that assets should get tapped at 5.65% a year, such that we’d go from 490K to 326K over 7 years. The issue is that any attempt to actually using these assets to pay tuition drives the EFC way up such that we end up with 177K not 326K and we lose the condo at year 5, even after using up all the stock.

Maybe I’m doing the math wrong (??), or maybe I just need to bite the bullet and sell the condo now, given how these things work, but if one of my kids gets some merit aid or doesn’t go to college this would have been really, really stupid.

Here’s the progression (if I understand correctly) assuming college tuition of $62K:

year 1: 
      - EFC is 51K
      - pay 28K from income; no money left
      - sell $27K in stocks to fund $23K tuition shortfall (27K=23K+4K gains)
      - have 123K remaining in stock

year 2: 
      - EFC is 51K
      - pay 28K from income; no money left
      - sell $27K in stocks to fund $23K tuition shortfall
      - have 96K remaining in stock

year 3: 
      - EFC is at 60.5K due to year one's 27K "income"
      - pay 28K from income; no money left
      - sell $38K in stocks to fund $32.5K tuition shortfall
      - have 58K remaining in stock

 year 4: 
       - EFC at 59K due to year two's 27K extra "income"
       - pay 28K from income; no money left
       - sell $36.5K in stocks to fund $31K tuition shortfall
       - have 21.5K remaining in stock

 year 5: 
       - EFC is 62K due to year three's 38K extra "income" 
       - pay 28K from income; no money left
       - don't have enough in stocks to fund 32K tuition shortfall
       - sell all 21.5K stock; pay 18K to school (after 3.5K cap gains)
       - sell condo; get 242K in cash after realtor, cap gains, depreciation recapture
       - pay remaining 16K
       - have 226K in cash

 year 6: 
        - EFC is 60K due to the year 5's 36.5K extra "income"
        - pay 28K from income; no money left
        - pay 32K in cash to fund 32K shortfall
        - have 194K cash

 year 7: 
        - EFC has gone down to 45K as 242K sale less than 340K equity
        - pay 28K from income; no money left
        - pay 17K in cash to fund 17K shortfall
        - have 177K cash...having started out with 340K condo equity and 150K in stocks
13

Why in God’s name do they have to go to a school that costs 51k a year? And the bad news if you are going to a private school that costs over 51k they may not even meet need and you could owe more! Look at your instate public opinion that might come in around 22k a year and is FASFA only and will not look at assets. (or look at other FASFA schools). Other OOS options with merit might only cost you 30-35k a year. They can go private for grad school.

14

So what??

How much do you feel you can PAY per kid per year…without liquidating any of your assets.

Frankly, you have worked very hard to get the assets you have. There WILL be affordable colleges out there for your kids if you look for them.

I’ll repeat what I said…I wouldn’t sell any of these things. Did you plan to do,that anyway…before you started thinking about college? If not…then don’t!

If you have a $28,000 EFC per FAFSA, that is the MINIMUM you will be expected to pay for colleges. MOST colleges do not meet full need. Colleges that meet full need will be using the Profile (unless you apply to Chicago or Princeton which use their own forms…the Princeton form has many of the same questions as the Profile). The Profile takes a much more in depth look at your finances than the FAFSA does.

What costs are the colleges your are thinking about? It sounds like you are looking at expensive schools. NO ONE…I repeat NO ONE must attend a college that costs over $60,000 a year.

Look for merit to help ease your finances for college. That is what a lot of families with lots of assets do…they don’t sell off all the assets.

15

@gearmom - The FAFSA will look at real estate assets

@jsb2000 - interesting spreadsheet - did you consider whether your income would change over the 7 year period. (Also subject to change: tuition will surely increase, the financial aid formulas could be tweaked, the value of your real estate and the rent you could get could go up or down, your income could change, etc.) If you can pay 28K out of income during the college years, can you save that amount now and have an additional 56K to put towards college?

But, yes I agree with the general point that you do not want to pay 51K per year under those circumstances.

What about having your kids take the federal direct student loans each year - 5500 freshman, 6500 sophomore, 7500 subsequent years and reducing the amount of stock sold accordingly until the end of the financial aid window? Also, are your kids going to have summer jobs or internships and contribute to their own support? Finally, gearmom has a very important point: You can find schools with a price tag below that EFC. Start with your in-state public system. Depending on your kids grades and test scores, you can look for colleges that offer merit scholarships.

You do not owe your child a college degree from any college they want to choose. Set a reasonable college budget for your family.

16

The assets won’t disappear unless you give them away. If you sell real estate or stock, I assume you will put the cash in an account. $340K in equity in the condo becomes $340K in an account somewhere and that account is now your asset. You can move assets around but how do you plan on making them disappear?

17 
Here's the progression (if I understand correctly) assuming there was 150K in a 529 plan rather than 150K in stock... would come out very differently...and way, way better...

year 1:
- EFC is 51K
- pay 28K from income; no money left
- pay $23 from 529b to fund $23K tuition shortfall
- have 127K remaining in 529

year 2:
- EFC is 50K
- pay 28K from income; no money left
- pay $22 from 529b to fund $22K tuition shortfall
- have 105K remaining in 529

year 3:
- EFC is 49K
- pay 28K from income; no money left
- pay $21 from 529b to fund $21K tuition shortfall
- have 84K remaining in 529

year 4:
- EFC is 48K
- pay 28K from income; no money left
- pay $20 from 529b to fund $20K tuition shortfall
- have 64K remaining in 529

year 5:
- EFC is 47K
- pay 28K from income; no money left
- pay $19 from 529b to fund $19K tuition shortfall
- have 45 remaining in 529

year 6:
- EFC is 46K
- pay 28K from income; no money left
- pay $18 from 529b to fund $18K tuition shortfall
- have 27K remaining in 529

year 7:
- EFC is 45K
- pay 28K from income; no money left
- pay $17 from 529b to fund $17K tuition shortfall
- come up with xK somehow
- have 10 remaining in 529
18

We have the same “problem” but with more assets. I highly recommend the evil parent plan. They attend a public school and graduate with no debt. They also have study abroad opportunities and possibly some parental contribution to grad school which can be more prestigious. This way the kids don’t have to worry about helping you at retirement and if you have medical needs. They also will get an inheritance. Don’t waste money. Consider the evil parent plan for families with high assets/incomes.

19

Thanks for your thoughts and your patience, all. Tuition, like health care, seems crazily high these days. Questions answered:

Spouse: There is a second, working spouse. No assets. No IRA. Adequate life insurance.

Me: Assets (some due to diligence, but much due to tragedy), IRA, no life insurance. Had emergency fund, but had to use it spouse’s credit card debt recently.

Rental income: That 5K is per year, and it’s after expenses but not after depreciation (schedule E reads “-3K” after 8K depreciation).

Schools: I won’t pay for fancy, but I will try my very best if one of my kids gets in to a job-almost-guaranteed school like Caltech, the job market being as difficult as it is. My mother worked her butt off to pay the tuition, and I could not say no if one of my kids got in go the same school. (Of course my mother was 35 and I am 50).

Info: thanks for the book recommendation. Will check that out.

20

I think your math imputes a meaning to the EFC which doesn’t exist.

Colleges will not guarantee you that their tuition will stay the same for four years, nor that you will only have to pay your EFC. So I think the premise of your math is incorrect.

Nonetheless- Thumper’s point still remains- your kids don’t have to be targeting schools which are so expensive AND you don’t have to move assets around for the sake of aid (which you still might not get) unless it makes sense from a financial perspective.

If you bought the condo as an investment, then run the numbers and see if it’s the best use of your capital (that return seems low to me-- are you getting as much in rent as competitive properties?) And if it’s not- then sell the condo. Not for financial aid- but because there are vehicles which could either be throwing off more cash OR appreciating faster. if you bought it to live in eventually and still think it’s the right property for your long term needs,then don’t sell.

The ONLY guarantee (right now- a lot can change in a few years) is the federal entitlement program, i.e. the Pell Grant. Like any other entitlement program, if you qualify you will get Pell. (and of course there are rules as to how to use the money, how it gets dispersed, audits, etc.) There are NO guarantees on how a college will choose to look at your financials or will choose to treat certain assets over others OR how they manage tuition increases OR a shift away from need to merit or from merit to need.

But you can tell your kids- there is no single scenario where low stats are better than high stats. That’s a fact and you can take it to the bank.