Financial Aid & Additional Asset - Please help!

Paying for College
1

<p>Greetings CCers,</p>

<p>I have been accepted to two schools and both basically want us to pay full tuition.</p>

<p>Let me start off with the fact that my father and mother are in the working class. Their total income per year is around $80,000. My father is 68 and is on the verge of retirement. My mother is 58. We do not have much in our savings account. We are currently still paying off $270,000 of mortgage on our current home. My parents are hard workers who have done nothing but save a lot over their careers. I am saddened by the fact they need to use all of their money for my college education.</p>

<p>My father purchased an additional home about 10 years back for $250,000. The market price right now is around $700,000 - $800,000.</p>

<p>According to my schools financial adviser, the extra asset is the reason behind our huge EFC (44k). </p>

<p>Please understand that is it rather difficult for us to pay for 4 years of college (which would cost around $200,000). The asset cannot be easily sold...</p>

<hr>

<p>After long talks with the financial adviser, we've come up with such:</p>

<p>We ultimately hope that the school (Northeastern) will end up giving some financial aid for the 2nd, 3rd, and 4th years if these plans work. I also understand that everything we do will be recorded in our tax returns.</p>

<p>Plan 1: Selling the house. Paying off the mortgage for our current home. Putting the money in retirement accounts (From what I hear the FA people / government do not count retirement as much towards the EFC / need based aid).</p>

<p>Plan 2: Same as above, except sell our current home as well and then purchase a more expensive house. This would leave us with little money on hand. (From what I hear the FA people / government do not look at the price of the home you live in).</p>

<p>Plan 3: Sell the house and then put most of the money into Bonds (can't touch the money for years). </p>

<p>Plan 4: Do not sell the house or sell the house. Pay full tuition for 4 years...(I plan on taking out $10,000 in loans every year to ease the cost).</p>

<p>Plan 5: Sell the house to a relative for a very low price. (But we still manage the home)</p>

<p>-Would any of these work in effectively giving us some aid for the next few years? From what I hear, schools don't drastically change their financial aid packages from year to year.</p>

<p>-There is another big factor that I failed to mention earlier...I do have a younger brother who will be going to college in 4 years (entering freshman when i'm a senior). Would any of these plans work for securing decent financial aid for him?</p>

<p>I would really appreciate some help on the matter. We are currently in a pretty difficult situation.</p>

<p>Thank you.</p>

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<p>
[quote]
Plan 1: Selling the house. Paying off the mortgage for our current home. Putting the money in retirement accounts (From what I hear the FA people / government do not count retirement as much towards the EFC / need based aid).

[/quote]

There are a couple of problems with this. Selling the house will create income if it is not used to purchase another house. The income will be used in the EFC calculation. And the amount you can put in a retirement account each year is limited. Any money left over would still be an asset. And I thought you said you cannot easily sell the asset?</p>

<p>
[quote]
Plan 2: Same as above, except sell our current home as well and then purchase a more expensive house. This would leave us with little money on hand. (From what I hear the FA people / government do not look at the price of the home you live in).

[/quote]

FAFSA does not look at primary home. CSS/profile (which I think northeastern is?) does look at the primary home.</p>

<p>
[quote]
Plan 3: Sell the house and then put most of the money into Bonds (can't touch the money for years).

[/quote]

Who gave you this suggestion? Bonds are an asset. They are *not * a protected asset under FAFSA. If you can't touch them for years you will have an asset you cannot use that is still used to calculate your EFC. So you will have to come up with the money but you cannot access the money.</p>

<p>
[quote]
Plan 4: Do not sell the house or sell the house. Pay full tuition for 4 years...(I plan on taking out $10,000 in loans every year to ease the cost).

[/quote]

Sounds like a plan.</p>

<p>
[quote]
Plan 5: Sell the house to a relative for a very low price. (But we still manage the home)

[/quote]

sounds like an attempt to defraud the financial aid system. I would not recommend it. So many pitfalls here. Without even researching it let me see - If the relative dies what happens to the house? The house will be part of the relative's estate and will be valued at the current value - not the very low price. so even if it is left back to your parents it may cause very high estate taxes on the relatives estate. If your parents die suddenly there could be estate problems. Do not even consider this. </p>

<p>Have your parents considered borrowing money against the second home to pay off the mortgage on the primary home? The primary home is not considered an asset by FAFSA so it would make more sense to have full equity in the primary home and have a mortgage against the 2nd home thus reducing the equity in the 2nd home. Even then it would still be a pretty large asset so I am not sure how much it would reduce the EFC.</p>

<p>What sort of financial advisor is suggesting these things to you?</p>

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<p>Also as the house is a second home and not used as a main residence the sale of the house would be taxable - probably @ $70k in taxes if it sells for $700k</p>

<p>I believe there may also be other tax consequences from selling the home at a very low price to the relative. If you sell the house at below market value to a relative the difference between fair market value and the sale price may be taxable under 'gift tax'. This could amount to a hefty sum. Something you would need a tax accountant's advice on. But I absolutely would not consider this.</p>

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<p>Your family is very fortunate to have this second home as an asset. If they do not want to sell the home and use the money to pay for college, perhaps they would be more willing to sell it when you graduate, and help you pay for your college loans.</p>

<p>It also sounds like your hardworking family has made a decision to invest use their real estate as their retirement. Many folks do that. You say you still have $270,000 of mortgage to pay on your primary residence. How much is this home worth? Perhaps on retirement, your parents will be selling one or both homes.</p>

<p>There is no way really to divest yourself of a $700,000 home and have the money evaporate into no where. Plus...the reality is that you HAVE this home and it CAN be sold to generate both retirement income in some way, and to pay for college costs.</p>

<p>You are not the only one in this boat. I personally know a few families who own second properties (land they purchased or vacation homes that have appreciated in value). They were very surprised to find that the financial aid folks viewed these second properties as assets to be tapped for college expenses. AND in all cases, their kids chose less expensive options.</p>

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<p>Thank you for the abrupt responses! </p>

<p>Swimscatsmom: These were ideas that my father is playing with.</p>

<p>And it really does seem that the only way is to pay up!</p>

<p>Thanks for the help =)</p>

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<p>Well I am relieved they are your Dad's ideas - I was worried he was getting some really bad financial advice! He needs to be very cautious of tax repercussions as well as financial aid repercussions of whatever he decides to do.</p>

<p>
[quote]
Thank you for the abrupt responses!

[/quote]
</p>

<p>When it comes to financial and tax matters there is not much point in prettying the answers up with ribbons and bows. Not that I have ever been very good at that anyway. ;)</p>

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<p>Innovational, I'm sorry that you think the responses "abrupt". I was just stating what I know about the situation. An asset is an asset...and there is really no way to get around that. Like I said...you're not the only one in that boat.</p>

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<p>I'm sorry - I meant thank you for the quick answers =)</p>

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<p>Personally I think Northeastern will not help you at all, as I have been dealing with them also for a few weeks and under similar, but not the same circumstances. They will view the second home as income producing property, which it is. They will not deal with you at all. Sorry.</p>

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<p>Innovational- I thought maybe you meant prompt not abrupt :)</p>

<p>Swimcatsmom gives excellent and detailed advice and what has already been posted is accurate.</p>

<p>It is a "flaw" in the system that some one with a huge company paid pension plan has an asset that cannot be touched and people who do not have that resource but who are doing the "right" thing are assessed on that value. It would be nice if there was a way to address this, but that takes a systemwide change. Back in the 19070s I am pretty sure FAFSA did not protect the primary residence. I seem to recall a lot of late 1970s SoCal whining about the inflated home values affecting financial aid of kids at my HS.</p>

<p>Maybe someday, as companies stop offering retirements, people doing this would be able to place such assets in a retirement plan, with age restrictions and with no limits like the $4-5000 of an IRA. Then we could save for retirement and buy investment real estate within that framework, but for now you have to deal with the reality of the system.</p>

<p>One thought, if your main & 2nd homes are near each other can you move to the second home which I assume is paid off and use the home with the $270k mortgage as the asset home? This would only help with FAFSA and only if the current value of that home results in a small equity.</p>

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<p>Innovational --</p>

<p>There is another solution to your family's rental unit affecting the EFC. </p>

<p>If your family can find a way to borrow 270K from the rental unit, you can then use it to payoff the primary house's mortgage and "reduce" the assets to be reported on FAFSA by that amount.</p>

<p>Also given the current real-estate slump, order an accurate appraisal of the rental unit rather than relying on realtors who are perennially bullish.</p>

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<p>Thank you for the answers. I now understand there is nothing we can do to increase FA for 4 years in college.</p>

<p>We've sort of decided on taking out a second mortgage in order to pay for college tuition. My dad plans on having it be a long term mortgage - 10 - 20 years - in order to minimize the monthly payment (1k or less a month). We currently pay 4k for our current home mortgage every month. </p>

<p>I really do like Northeastern and I plan on giving it my all there (good grades, socializing, doing what I enjoy)...is this all worth it? is interest huge? From what I hear, mortgage rates are at an all time low because of the economic slump. An adviser suggested that it wouldn't be a great idea...(especially if I wanted to go to graduate school - I currently have no idea if I will be attending graduate school...in what circumstances would one go to graduate school?) I feel sad about putting such a heavy burden on my parents because of college. It is unfortunate that we are in such a situation...</p>

<p>Tuition is 48k a year...if I wanted to borrow 8k every year (32k total. My parents would end up paying 40k a year), how would I go about doing this? Is coming out of college 32k in debt an unwise decision? Will I need to be paying that back immediately after graduation? </p>

<p>Again, thank you for all the support. It's comforting to know that I have all of you by my side.</p>

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<p>Are you serious? You said your parent's income is $80,000 per year. $4k per month would be $48K per year which is either at or more than the take home pay for an $80K salary. </p>

<p>Honestly, it sounds like you are real estate rich and cash not so rich.</p>

<p>Can your family really add another $1000 per month onto their payments? How will they qualify for another mortgage with payments already so close to their take home pay? That would make the total $60K which I am well sure will be in excess of what they take home if their total salary is $80k. Something doesn't add up here.</p>

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<p>Are either of your parents self-employed?</p>

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<p>If I were you I would be less concerned that I am graduating with loans of a 32K total since it is reasonable amount. </p>

<p>I am more concerned that your Parents are spending 160K of their retirement assets(assuming they can even service the debt) given their current age(68) and due to the fact you have a sibling 4 years younger also.</p>

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<p>Owlice: They are not self-employed. </p>

<p>Thumper1: We get about $5200 a month in rent money - and that covers it.</p>

<p>(Apparently every year we take a loss - only if repairs are needed - on our additional home).</p>

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<p>Innovation...I think I understand now. The reality is that your rental property is generating an additional $62,000 of income for your family. When you add that to your family income of $80,000, it brings your family income into a higher range. I realize that there are expenses also associated with a rental income, but yours also happens to have appreciated in value quite a bit. </p>

<p>I'm not sure what the answer is...like I said...real estate rich...cash not so rich.</p>