Take money out of your savings or checking account, where it would otherwise need to be reported as an asset on FAFSA. Use the money to improve your primary home – upgrade the kitchen, add a deck, whatever. The value of the home will likely increase. The money is no longer in the bank account to be reported on FAFSA, and the value added to the home is also not reported. That’s how it helps.
HI Belknap…Ok I understand now. It assumes you have liquid cash in savings or checking.
That’s like saying to put the cash under the mattress, here the mattress is your own home. (except an actual mattress may be more worthwhile, give the recent past recession in home values)
@mannysan1 - Yes, what @BelknapPoint said. Or if you are thinking far enough in advance, pay off your mortgage (or put money in retirement accounts) instead of saving money in non-retirement accounts. That’s exactly what we did…paid off our mortgage and put most of our savings into retirement accounts. Neither are used as assets for FAFSA purposes as for profile schools, retirement isn’t used, and home equity varies by school.
I’d love to be able to say we knew what we were doing in regards to college financial aid, but in all honesty, those two destinations were just simply our goals and it worked out nicely for FA.
The fafsa formula does NOT use primary home anything. It does use regular savings above an asset protection allowance (which isn’t very high anymore).
SO…if a parent can reduce their assets significantly by paying down a primary home mortgage, it will reduce their assets.
BUT…
- Assets are only assessed at 5.6% of value for FAFSA calculation purposes. So....$100,000 in assets would add $5600 to a kid’s EFC. $10,000 in assets would add $560. Unless the family has a LOT of extra money in savings...this probably isn’t worth doing. It might be better to just pay that extra 5.5% and not tie up your money in a house.
- MOST colleges do not meet full financial need. That being the case...all of,these financial gymnastics might not yield a nickel of additional need based aid.
As another well regarded long time poster has said…don’t do things for financial aid gain that you wouldn’t be doing anyway. She says it better than me! But point is…if you weren’t planning to pay off your mortgage…then don’t.
Agreed. It worked for us, but it was something we were aiming to do anyway. (It also freed money up for tuition…money we were paying our mortgage with simply was redirected now to tuition).
Absolutely! I agree, most of the time it’s really isn’t going to make much of a difference. (Plus when FA comes in the form of loans, that’s not really helpful either).
But it worked out for us…We were a very rare exception…my D attended a “meet full financial need” school and they used the FAFSA to determine need for her (typically they used profile, but for some scholarship winners, they used FAFSA only). So for us, we hit the trifecta with her FA…We had paid off our mortgage, most of our savings was in retirement accounts and our kids overlapped by 2 years. Her last 2 years of school became incredibly affordable.
For simplified needs another condition would have to apply, for example being able to file a 1040A.
Pretax 401 contributions are reported as part of untaxed income on the FAFSA.
For simplified needs…income needs to be $49,999 a year AGI or less…AND one of the following has to also be applicable.
- Ability to file a 10A or 1040EZ tax form
OR
- Qualifies for a means tested benefit like SNAP or free/reduced lunch.
OR
- A parent is a dislocated worker.
@ClaremontMom: Agreed that maxing out 401k and putting all cash to pay down the home is good at many levels.
But for Fasfa purposes, that is just saying that I don’t have any liquid cash lying around ( nor any CDs), that I need to report on Fafsa. (Even if I had, I could pay all to the home today, and report no-cash savings in Fafsa)
As Thumper1 said, the impact of cash savings is not much. I think the biggest impact is the income. Are there any tools to minimize this impact, or any ideas?
How can you minimize income from 2016? That would have needed to be done in…2016. The 2016 income is what is used on the 2018-2019 financial aid forms.
@thumper1 So for kids starting school in 2019 Fall, for the school year 2019-2020, I would be using 2017 data or 2018 data.
@ultapradesh I don’t think you can really do much about income except work less or quit your job. But that is hardly a solution.
If your kid is starting college in fall 2019, you will complete the 2019-2020 FAFSA using 2017 data. So…if you planned to reduce your 2017 income…it’s a little late for that.
As noted by @ClaremontMom the only REAL way to reduce your income is to work less…or quit your job. That’s a pretty drastic measure for financial aid gain…especially since MOST colleges don’t meet financial need for all…and you might not net yourself additional need based aid.
not interested to work less,
@thumper1 One more question if kids apply for a school and you have substantial $$$$ in your deferred Plus ROTH IRAs, what percentage you will be paying to college fee as family EFC contribution. Like you nention in FAFSA one has to pay 6.5% or something like that. What % of home equity will one has to contribute against home equity in profile or FAFSA school. Thanks A lot.
My wife did quit her part time job in 2015 as the income from that year was counted twice in FAFSA 2016 and 2017. Other than that year, there is less benefit by working less.
@ultapradesh - Roth is still retirement money which is not held against you.
Home equity is only used for CSS Profile schools and vary. This chart (disclaimer: it’s not very recent) shows some examples and explains how home equity is used.
http://www.thecollegesolution.com/will-your-home-equity-hurt-financial-aid-chances/
thanks so much @ClaremontMom for the links and explanation. I appreciate it very much. I am so much relived that they will not count retirement money.
@ultapradesh - You’re welcome. As a side note, I hadn’t clicked on the link to the spreadsheet in the article when I posted (if you missed it, the title “Home Equity Spreadsheet” is a link to an actual spreadsheet). I just looked at it and noticed 2017 dates so it appears they do update the spreadsheet even though the article is old.