<p>Hi! New to College Confidential. My 16-year old (a nearly perfect young adult) and I are starting to look at colleges. Aside from wanting to match her with schools with good political science departments, the cost of college will be a deciding factor.</p>
<p>When my husband, mother and father all died a few years ago, I was left with some assets (not a lot) which I have carefully invested and which generate about $30K a year in income. I can get by on this, but just barely. </p>
<p>Are there any suggestions as to how to represent my financial situation so that I am not forced to spend the principal that I have invested? I own my house with about a $100K mortgage. </p>
<p>Also, because education has always been so important to my family, I have been working at my daughter's private school to offset her tuition. There are no real wages that come to me from this job aside from tuition remission, so in terms of earned income I can honestly say "bupkis" (if that is still a word) but at the same time I am not technically broke. </p>
<p>Interesting question. Many colleges will certainly just go by their book–principal counts. I would think FAFSA only schools would for sure. I could see the very generous schools listening to your argument, but this is just intuitive–I’ve never heard of this being done. If you are able to work, I would think they may expect you to continue to and also pay from income.</p>
<p>At many schools home equity comes into play for all and I can’t see them ignoring that.</p>
<p>You probably won’t know until acceptance though, so it sounds like merit aid schools should be a big part of your list.</p>
<p>i’m guessing that if you’re receiving $30K/year in income from your assets, and not dipping into the principal, then these assets much be substantial. However, FAFSA which is what almost all public schools and many private schools use to determine need, is heavily weighted towards income. Assets are only assessed at 5.6%, after an age-based asset protection allowance (around $50K). So if your taxable or adjusted gross income is $30K/year (from dividends and interest) then FAFSA will consider a relatively small percent of that available to contribute. If any of that is tax-free, then it wouldn’t be included in your AGI. </p>
<p>But if your assets are high, then this will raise the amount you’ll be expected to contribute. Subtract $50,000 from the total amount of your assets, multiply by 5.6% and that will give you a simple baseline of what your estimated family contribution will be.</p>
<p>FAFSA does not consider home equity in its formula.</p>
<p>With zero earned income, you might be eligible for the simplified FAFSA formula, where assets are not reported. If you have earned income under $50,000 and did not file a Federal 1040 (this means you filed either a 1040A or 1040EZ instead) then you do not include your assets in the FAFSA. The Simplilfied Formula will kick in automatically when you file.</p>
<p>Probably can’t file the simplified form with significant assets. If she’s making $30K now with the kind of conservative investments someone in this situation is likely to have, unless she owns just tax free bonds, her EFC is likely to be above most state school’s (FAFSA schools) COA.</p>
<p>I also wonder if Profile schools will add her tuition offset to AGI, they would do this with a business. And then all but a few will add in home equity…</p>
<p>Fairfielder here. I am fortunate to have friends who have given me a favorable rate of return on my investments. So my figure of $30K/year represents $300K in assets. In my small Iowa town it is possible to live on $30,000 a year with an old car and a penny-pinching temperament, but I don’t recommend it as a basis for putting a child through college (and then grad school or maybe I am dreaming!!).</p>
<p>The tips posters have given me on simplified FAFSA and age-based asset protection allowance have been very helpful. Thanks.</p>
<p>If the original poster has capital gains or or dividend/interest income over a fairly low threshold, then she will have to file a 1040 and lose the ability to have her assets ignored under the “Simplified” formula. </p>
<p>Thus, I am shocked, shocked, to find some system-gamer saying that she should consider converting her investments into types that do not generate those kinds of income. It may not be too late if the nearly-perfect child is only a junior. Next year’s tax year will be the base year for the first FAFSA.</p>
<p>FF, you’re new here, so let me explain. Some people on CC think that understanding the details of the financial aid system and then making changes within those rules to maximize your aid is “gaming the system.” A Bad Thing.</p>
<p>Since as you have now revealed you have $300K in assets, that amount less the asset protection allowance (@$50K) is going to be “taxed” each year at a rate of 6% to pay for your child’s college education. So about $15,000 in year 1, $14000 in year 2, etc, will go up in smoke. It will be like buying a new car every year for cash and pushing it off a cliff. Unless you do something.</p>
<p>Consider something like this. Put your money into I-bonds and gold bars, investments that do not generate reportable periodic income and trigger the need for a 1040, and get a fun job for the four years your child is in college. Live off the wages. You are already volunteering at a school – maybe there is a paying gig like that available. That’s just one idea. You have time to evaluate all the possibilities. Or push those cars off the cliff.</p>
<p>If you cannot file a 1040EZ or 1040A, you will not be able to qualify for the simplified needs test, I don’t believe (unless your child gets free or reduced lunch or you receive some other government subsidy…which doesn’t sound like it’s the case). I’m not sure, but I think someone with interest/dividend income in excess of a certain amount has to file a 1040. I’m not a tax expert…check with someone who is.</p>
<p>Also, if you itemize your deductions and file a 1040, you cannot use simplified needs.</p>
<p>I agree with dt123 that it’s important to understand the details of how financial aid works and allocate assets, within the big picture of one’s financial plan, accordingly. To legally move assets from class to another, with an eye towards reducing calculated EFC, is a legitimate form of financial planning. Paying down a mortgage would be one such way of reducing assessed EFC, if that makes sense from a big-picture standpoint. Many would argue that paying down a mortgage reduces leverage and does not make sense from a big-picture perspective, but each family’s situation is different.</p>
<p>I would argue, however, that spending $15,000/year on a child’s education is in the long run a good investment. I’ve heard the “BMW over the cliff” scenario before, and agree that spending $50,000/year on a college just might fall into that category. But looking at the overall return of a college education, $15,000/year seems like a good investment.</p>
<p>And Fairfielder congrats on your 10% annual return, if this has been your historical return during both up markets and down.</p>
<p>Your assets sound modest enough that if your near perfect child is HYPS material, it would be worth talking to those schools to see how they would treat your situation.</p>