<p>I do not believe it is “immoral” to set yourself up for optimal financial aid from college. It’s called smart planning. Done all the time to get Grandma eligible for Medicaid, and that needs 5 years of planning before hand as too many people were doing it to avoid depleting her assets for her care when there federal government will step in when there are no assets.</p>
<p>But do be aware that the situation can truly depend on the choices a student has. Even more important, college is not the be all and end all. To live ones life fixated on maximizing college financial aid is not the way I would recommend anyone to go.</p>
<p>First of all, if you know your children are not going to be going to those schools that guarantee to met full need, that they are going to be in the market for FAFSA only schools, gearing some things to the FAFSA makes some sense. But be aware that if a student is looking at the PROFILE schools, things like home equity being shielded go away. As a general rule, the more assets a parent has socked away, not in the kids’s name but in the parents’, the more choices the kid is going to have. Parents have an asset protection amount, and the hit on assets over than amount is 5.6% rather than the hefty 20% on the students’ assets. </p>
<p>Before going much further with this, I want to point out that FAFSA schools do not tend to meet 100% of need anyways, so even having that zero EFC is not necessarily going to make a huge difference in many students’ lives and to go through contortions to achieve that goose egg is not worth it. You get a maximum of $5600 of PELL money with a rock bottom zero EFC. It’s an auto zero if you can file a short form for taxes and have an AGI (I believe or other income figure, do check as you should check every thing before going onit) of $23K for parental income. That’s the ONLY federal guarantee that a zero EFC will give you if the cost of college supports it.</p>
<p>Then you have the Stafford Loans which are available for all students that meet FAFSA requirements (citizen, no major drug conviction, etc) which are maxed out at $5500 for freshman year and go up a bit each subsequent year. Some of those loans can be subsidized if your student demonstrated need with the EFC and Cost of Attendance (COA) of his college that is unmet elsewhere. </p>
<p>And, that is all, a zero EFC student is entitled to get, and the loan is gettable regardless of EFC most of the time. The rest is like buying lottery tickets Now some states do have additional programs for low income families or maybe all families, and if that is the case, there is more guaranteed money, but usually not enough for a kid to go off to sleep away college for “free”. Even in my state where there is TAP (NY state money) and low state tuition costs, a zero EFC kid is going to have to come up with about $5K minimum to go away to a state SUNY. None of our state school guarantee to meet need and the rarely do meet 100% of it. </p>
<p>Parental income is the primary target for determining cost. What you make the years under scrutiny for FAFSA and other financial aid calculators is hit very, very hard as it indicates not only what your current financial situation is, but assumes that you have saved in a way someone making that amount today would have, and also figures what you can afford to borrow in the future. Not accurate, as who knows what any individual made in the past and will make in the future, but averages is the way this works, and “them’s the rules”. So EFC is made up of your income as reported on your tax return with any 401K like contributions you may have made and deducted from your taxable income added back in. All that comes right off of your tax form. Better to make a deal with medical and other bills owed to pay back what you owe little by little over the college years than pulling the money out of the 401K or IRA because, yes, absolutely you do have to include that amount as income for that year, just as you do have to do so for taxes. If you can show a college what you paid in medical bills with that withdrawal, some professional judgement might be made for that, by the way, and is someting you might consider, but it had better be clear proof as to what happened. I’ve actually seen situations, where yes, medical bills were sky high for a given year, and yes money was withdrawn from the accounts, but the bills did not get paid. Or the bills did not get paid but families want consideration for the fact that they were incurred. Nope. Gotta be paid. But, yes, it is a big hit to withdraw form sheltered assets in terms of EFC.</p>
<p>The other thing that a parent needs to consider is remarrying. Doesn’t matter if there is a legal prenup or what the agreement is about the step’s contribution is for college support. His/her income and assets are included. So maybe a ceremony and wait for the actual marriage certificate is in order if a lot of money is on the line. There was an article I read about a set of twins who were on a nice fin aid ride as mom did not make much and NCP,the dad’s, financials were not included on FAFSA. Mom remarried, and the step quashed the finanical aid awards simply because he made some money and had some assets. Too bad that he did not want to pay for his step sons’, whom he barely met, college bills. Them’s the rules.</p>
<p>Students can work and make up to $6K a year, I believe without having earning affect the EFC. After that it’s 50% of earnings. And every dollar a student has as a reportable asset is hit up 20 cents on the EFC. Every student who is looking for financial aid should open an account with the parents’ name and SSN primary on it, and put any money in there that are not financial aid/scholarship proceeds. Then it is under the parent’s asset protection or 5.6% hit if it so exceeds. Those funds should be designated as student contributions and reimbursements for costs </p>
<p>So a student should not eschew work or savings. There is some benefit of doing so and saving for college even if you do get hit with the “student penalties”. It;s not 100% of what is netted, though if the expenses of working or having the funds leads to spending more., that can happen. But, kids who salt away a nice bit for college do have more options as a rule than those who do not. </p>
<p>A lot of the problems with paying for college these days comes from the fact that there is not a lot of savings for it. When I was kid, there were the savings bonds that seemed to be standard gifts and awards. Also, in my family, the kids, I and my brothers, saved for college. We worked during the year, babysitting and doing other odd jobs and getting paid, and put about half of what we earned into savings as well as tithing any allowance for the same. We also worked summers. So even though my dad, the sole bread winner of our family did not make much money, we all had college savings and so did he. With 529s , there can be some nice state tax breaks in saving as well, and 529s are included as parental assets so are only hit up the 5.6%. </p>
<p>The cost of college is the sum of past, current and future income of both student and parents. Any financial aid the colleges give, any scholarships earned, can lower that cost as can choosing lower cost schools. Your savings are the past income, current is what you make now and can cut back on, and future is what you can afford to borrow. If you are in an income bracket where you can’t write that check for the full amount and send your kids to a 4 year slumber party, the kid is going to have to work those years s/he is in school on weekends, maybe a few hours during the week and during the summer. You are going to have to tighten the belt to pay what your share of the college costs are. You’ll get some savings with one less mouth to feed at home, if the kid is away, and the utilities bills are likely to go down too. Maybe your car insurance can be lowered. But it means tightening the budget belt even tighter. If you take out parent loans, it’s smart to start paying on them right away as you can then feel the impact and know when you are getting in too deep. It is highly unlikely that you are going to have more money than you have saved in the past and are scrimping on right now in the present, in th future where everyone likes to push things. </p>
<p>Yes, owning a house can help in terms of “hiding” assets since home equity is not included as such for the primary home on FAFSA. But only if it works out. My home has no equity, and many are in that situation, so that it’s rather a moot point. And homes can need all kinds of things which mine does. It’s not a guaranteed panacea. Also any PROFILE schools will use home equity, though they do cap it. But yes, if you owe on a home and can open a low interest home equity loan line, it might be a good idea to take the money out of your account and pay off your mortgage so you don’t get hit the 5.6% of parental assets that the EFC uses over the parental asset allowance. Just realize that the money might not be as easily accessible when you do that and if the value of your home goes down it gives you less time to recoup that money if you need it. </p>
<p>My SiL’s niece and nephew are currently at state schools, and one did not get a red cent despite a very low EFC. Two in college, low income, house paid off (given to them by parents long ago), limited assets but PSU gave the one nothing other than some PELL, the Staffords, maybe a bit more in some low income grant, not even $1K, some work study. Not only that, he was required to attend the summer term for an additional cost. That the Stafford and work study were included in the package meant that the loans could not be used to pay the EFC, and the hours for the kid to work were also locked into the package and could not be used toward EFC either, along with the summer when he had to come to school. Drexel did not meet need either, though he could possibly commute there bringing the cost actually close to PSU that first year with the requred summer term costs. There was no embarrassment of riches in store for this family, I assure you, to pay the college costs. And with just OK test scores not much in the way of scholarships. Another cousin with higher test scores got some options which I described in an old thread I wrote as to how one family is doing it. <a href=“http://talk.collegeconfidential.com/financial-aid-scholarships/1367319-how-families-sometimes-do.html[/url]”>http://talk.collegeconfidential.com/financial-aid-scholarships/1367319-how-families-sometimes-do.html</a></p>
<p>Just to make it clear about IRAs and 401 Ks: ANY withdrawals from them are considered income less the taxes you have to pay on the withdrawal , as you do subtract out the federal tax you pay that year from the AGI reported. If you are contributing to these plans, you have to add back in those contributions to an IRA and 401 K to your AGI for that given year which the 1040 allows you to subtract out. You can borrow from the 401k and that is not reportable income, and that is restricted and regulated by the rules for your 401K. Some permit borrowing, some don’t and there are variations as to what the terms and limits are on such a loan. What it comes down to is that though you can subtract out your 401K type contributions from your taxable income for tax purposes each year, that subtraction is not recognized by FAFSA, so you have to add that amount back in. What you already contributed in previous years, remains sheltered.</p>
<p>Financial aid is set up so that everyone can attend a local state college. It’s not to pay for sleep away costs, though it can end up doing so for those intrepid enough to find a school cheap enough and/or get the fund through the school or other aid. Most of us live close enough to a community college or other local state school so that any college aged person can commute there and work part time for the commuting costs. The tuition/fees costs of such schools can be paid by PELL for those whose families make very little money, or through Stafford loans for those whose parents can’t and won’t pay, even if they are deemed able to do so. The average college student is in his/her mid twenties and beyond, goes to school part time and works at least part time, slowly making his/her way to a degree, if ever getting there. Forget the Frat party tv sitcoms and movies. This is the reality, which I’ve yet seen heavily focused up by entertainment. Not very entertaining, for sure.</p>
<p>If your kid can swing the 2 year local college without the loans, borrow the money anyways and have it in a designated account by itself so it does not have to be reported for the next years’ FAFSAs and when it comes time to transfer to a 4 year school away, that 's about $12 that can go towards those costs as well as the additional amounts that the kid can borrow for the school year. The big problem with the community/local college commute route is that if there is no 4 year school within commutable distance, then you gotta live on campus and there will be costs for that. But then you have 2 years left, rather than 4 and a kid with a track record instead of having that 40% chance of flushing out that such kids have, so at that point, borrowing becomes a less shaky investment. And parents should be salting the money away those two years at the local school in preparation for the next 2 away in such cases as well.</p>