Help with sudden financial developments

Paying for College
1

<p>Hi I am new to the threads and have been reading some information that has been helpful. However, I now desperately need advice.</p>

<p>My D will be going to college in 2010. After many good and bad years and netting out the financial crisis losses to our mutual fund we have about 30K cash to apply towards college. Not a lot but we took a hit. We both work and have a household income of $160K, about $30K from my husbands retirement income but he works a full time job. We live in a very high cost of living state, so this salary standard middle class here. </p>

<p>We own a home and also own a small rental apartment in another state, both have equity, but we are also still paying mortgages on them. Our goal was to sell the rental after college to help pay off any outstanding loans. Prior to this, we owned a business which supplemented our income but that has been shut down due to the economy, there are no more clients.</p>

<p>Yesterday, husband confessed that he has outstanding debt of 65K, that he has secretly kept from me, due to the residual overhead from the closing of the business. After the almost heart attack, I realize our financial position is changed drastically. A large portion was taken from our universal life insurance as a loan and another portion as a bank loan. Stupid of him but now we are stuck with it. The life insurance was our savings net for last resort. That is now mostly gone.</p>

<p>Please advise what are our D's options. We have another D going in 5 years. I was counting on a variety of grants, loans (as little as possible) and pay as you go from income. NOw we have to use the current income to pay the loans he took out. Can the debt be offset from our EFC?</p>

<p>She is an URM and an honor student with great possibilities, we have been looking at private LAC's (not ivy) and state honors.</p>

<p>At this point divorce is also an option, this was the last straw. Would she be better off?</p>

<p>Thank you for your input.</p>

2

<p>Personally, knowing my daughters, a divorce at college application time would have been devastating. Just my person opinion. And logistically, it would only help with the FAFSA only schools, mostly state supported universities. Most private LAC's want CSS as well and would want yours and your husbands income, assests, etc. Look into second tier schools that offer merit aid, or aid for minorities. My daughter applied to a variety of schools from Ivies, to top notch state schools, to medium of the road LAC's and lesser prestige state. She received many full tutition offers from the lessor schools. </p>

<p>Good luck. This economy is terrible and many persons have lost everything. Try and be strong for your entire family.</p>

3

<p>Colleges absolutely will NOT consider debt in calculating your EFC. With an income of $160,000 and equity in two properties you were never going to get need-based grants anyway. </p>

<p>Apply to colleges where your D is in the upper 75% of stats to maximize merit aid. Honors programs at your state U are your friend.</p>

4

<p>As a URM, was your daughter's PSAT score high enough to get her to National Merit Hispanic or National Merit Black. If so, there are a few state schools that will be sending her jaw dropping offers for full rides or very close to it. Arizona State's Barrett Honors college is a great school and gives out of state National Merit scholars about $20,000 worth of aid leaving you with a balance of less than $5000. Also, U of Alabama will give a full ride plus a laptop! I know there are others but those come to mind right now as those were some of the offers my son got.</p>

<p>For what it's worth, most of the Ivies and Stanford type schools are offering fantastic financial aid packages that make them MORE affordable than state schools.</p>

5

<p>Thank you for the quick replies. We do have a variety of colleges on the list. I guess we will need to take another look and eliminate others.</p>

6

<p>Would it make sense to sell the rental now, even though it's a down market? Maybe you could use that equity to pay off the loans so they'll be gone before college tuition payments start. This would also eliminate that mortgage payment, which would free up more of your income for college expenses.</p>

<p>I don't agree that an income of $160k rules out need-based aid entirely, since that depends on the school. But need-based aid probably isn't going to amount to much, if you get it at all. </p>

<p>If a college doesn't count home equity, it sounds like your Expected Family Contribution will be based mostly on income, since the rest of your assets are so diminished. You could try out the EFC calculator at the College Board web site - it includes both the federal methodology (FM) and a standard institutional methodology (IM). But keep in mind that each institution that uses the IM can tweak the formula, so you can't rely too much on what the IM part of the calculator tells you. Many colleges that use the IM cap home equity and a few don't use home equity at all, and either variation can have a big impact on your EFC. So in a way, the IM formula used in the College Board calculator is a worst case, since it doesn't cap home equity. You can also find institution-specific EFC calculators on some college web sites (e.g. Princeton, Allegheny). </p>

<p>Remember too that even if your daughter doesn't qualify for need-based aid, she can still get federal student loans. The limits go from $5500 in the freshman year to $7500 in the senior year.</p>

7

<p>We did look into selling the condo but in this market who knows? We do have a tenant that covers the mortgage but that is never a guarantee to be there in two years.</p>

8

<p>
[quote]
If a college doesn't count home equity, it sounds like your Expected Family Contribution will be based mostly on income, since the rest of your assets are so diminished

[/quote]
</p>

<p>Colleges that don't count home equity, discount home equity on the primary residence. The income generated and the equity from the condo will be counted as income on both the FAFSA and the profile.</p>

9

<p>In our experience, many colleges--even those with deep pockets-- will expect you to kick in 80-100% of the value of real estate other than your actual residence over the course of four years. So they are likely to expect you to contribute the value you have in the condo whether you sell it now or not. If you do not or cannot sell it, they will expect you to borrow against it. The fact that it may be difficult or downright impossible to sell it or borrow against it will not be considered by some schools, even after appeal. We ran into this situation with a piece of property that is owned jointly with other family members who refused to sell it or buy us out, and against which we could not borrow. (It had been tried.) Not to mention the fact that we don't have the income to pay the loan if we could get it.</p>

10

<p>As with all advice,you get regarding financials, run this past an accountant or someone who has a financial background and knows your whole situations. Decisions that can increase college aid can affect other things adversely and its the whole picture that counts.</p>

<p>With your income, you are waaay past getting PELL money which is just about the only grant that FAFSA will guarantee you. Unsubsidized Stafford loans will be availible to your children, and possibly, subsidized. Your state may have some school loans available as well. As far as low income grants go, I don't think the chances are good at all that you will qualify for any of them. A divorce "could" help if you split the income and assets appropriately, but that is really only to get FAFSA qualifying grants, and it is rarely, rarely, rarely recommended to go this route. The cost of the paperwork alone can exceed that money, and may necessitate game playing that can be an issue. If you and H are truly going to get a divorce, then some play is there to make one parent's financial situation so low that the kids qualify for PELL and other low income grants if that is their custodial parent. Again, this is not a route I would recommend anyone to take even if they can get a few thousand from the government.</p>

<p>Most schools that meet financial need also expect an additional financial form, usually PROFILE and both parents have to be included on it, so a divorce is not going to help much in this situation.</p>

<p>Something that may be to your advantage to do, is to take out additional mortgages or HELOCs against your properties so that their net asset value is zero. Then you can pay off the debts with that money. Debts against property do lower the market value of the properties. Otherwise debt is not considered in the college financial aid picture at all. The bank that gave you the loan would be happy to have your house secure it , I would think. Be aware that once you do that, if you cannot pay the loans, your house or apartment would be at risk if they are securing the loans. </p>

<p>Most financial aid formulas are very much income heavy. So even with your assets down to nearly nothing an income of $160K for a family of 4 is going to be hit heavily for college contributions. Though there will be some schools that will give you some aid for that income level, most will not. </p>

<p>I suggest playing around with some financial aid calculators and see where your family stands. You may be right on the border of getting something. If that is the case, you can take some action to tip your situation into a more favorable one. If not, you can spare the trouble.</p>

<p>My opinion is that you will do better looking at schools that have generous merit aid available. You and your kids will probably have access to some loans. When looking at colleges, keep this in mind.</p>

11

<p>momfromtexas found full-ride scholarships for both of her children. You can read about her research strategies, and find some good suggestions from other people, at these two threads:</p>

<p><a href="http://talk.collegeconfidential.com/parents-forum/291483-update-what-i-learned-about-free-ride-scholarships.html%5B/url%5D"&gt;http://talk.collegeconfidential.com/parents-forum/291483-update-what-i-learned-about-free-ride-scholarships.html&lt;/a&gt;&lt;/p>

<p>Wishing you all the best!</p>

<p><a href="http://talk.collegeconfidential.com/parents-forum/148852-what-i-ve-learned-about-full-ride-scholarships.html?highlight=what+I%27ve+learned+about%5B/url%5D"&gt;http://talk.collegeconfidential.com/parents-forum/148852-what-i-ve-learned-about-full-ride-scholarships.html?highlight=what+I%27ve+learned+about&lt;/a&gt;&lt;/p>

12

<p>cpt of the house,</p>

<p>It sounds as though OP is fed up with her H and is considering divorce because the guy lied to her and made poor choices. Personally, I do not understand why he took personal loans out -- he should have kept business finances part of the business's accounting. But whatever.</p>

<p>A divorce might help but then again, there are two pieces of property and now this debt. </p>

<p>I would separate college from the divorce. Take the kid to see some schools where she will be welcomed with open arms; figure out an affordable school. Keep the 30K for college.</p>

<p>Sell the condo and pay off the debt. </p>

<p>JMHO.</p>

13

<p>Iron Maiden is right about schools NOT considering debt in the EFC calculation. They consider income and assets. If you have a lot of debt and assets you could consider paying down the debt. Debt reduction prior to a child entering college is generally a good move. For FAFSA home equity is not included as an asset, but the rental property would be included as an asset. FAFSA does allow an exclusion for assets based upon the age of the older parent. e.g. if the older parent is 55 you would get about a $63,000 exclusion. If your assets were at or below $63,000 your EFC contribution for the parents' assets would be zero. EFC would be dependent upon income only and the student's EFC contribution. If you use savings to pay off debt, there is no advantage EFC wise to reducing assets to less than your exclusion amount. I'm not sure how CSS profile (institutional methodology) takes assets into account or what exclusions they allow. In addition some schools tweak Profile parameters on their own.</p>

14

<p>Maybe you should go to one of those workshops that tell people how to best arrange their finances to maximize potential aid from colleges. It's particularly good to do this a year in advance. There was an article about this in the NY Times today.</p>