<p>“jrmills, I think your assuming that your asset (house) or savings will make much of a difference in your EFC. The truth is, there is very little need-based aid for anyone making 160K with or without assets. Especially with on child in college.”</p>
<p>No, I have learned through this thread that AGI means most everything, and house and savings aren’t big factors. The disturbing thing is that the colleges use AGI to assume how much you should have saved up, as other posters have made it clear that EFC is expected to come from current income, plus savings and loans. The problem, as I have illustrated, is that people with a given level of AGI don’t necessarily have the same amounts of assets, and that these differences aren’t always the result of an extravagant lifestyle. Frankly, I would be better off if asset levels did play a bigger part in the formula…</p>
<p>OP - I hear you have little savings. I’m in the same boat. We borrow against future earnings for our kids to go to college and use our present income. We too have old cars and a modest house. But, if I got a recent raise of 40K (what I would need to get me to your income), for example, I would expect the colleges to charge me 20K more in tuition. I’d still be 20K “richer.”</p>
<p>jrmills - by your own admission you did in fact have extra to save over the years, but you <em>chose</em> to put that extra cash into paying down your house. I would love to have the security of paying down my mortgage as well - but I knew I needed to save considerable amounts for educating my children. I sympathize, it’s difficult, but at least you were one of the fortunates who had choices…</p>
<p>No, GTalum, if you received a 40K raise, you would not see 40K more in your bank account. You’d have to pay taxes on the 40K, not to mention that the marginal tax rate for that last 40K is higher than for the preceding 40K.</p>
<p>We would be thrilled to pay $15K per year. Our daughters 1st and 2nd choice schools are asking us to pay $50K! We are pretty much in the same hole as cptofthehouse. We are basically being congratulated for being frugal by being asked to completely vaporize every dime of our equity in our house. </p>
<p>People who have a few years, congratulations for doing research early, and now, listen up, if you have equity in your house, here is what you should do: take out the BIGGEST second mortgage you can, or refi and cash out the MAXIUMUM you can. Start now contributing $16,500 per year to each parent’s 401K/IRA (I think it is $21,000 if you are over 50). Do this EVERY YEAR. If you are self employed, you can contribute even more! When you get to the point where you are filling out FAFSA, guess what? All that money in your 401K/IRA is <em>invisible</em>. You assets will be greatly reduced, because you will have little home equity. Cha-ching. Your EFC will be much lower. Have a good retirement!</p>
<p>The poor people like cptofthehouse and us? So sorry. You’d better head to the bank and take out ALL of your equity, and HAND it to the school. The fact that you just destroyed your future? Too bad you didn’t learn the racket sooner.</p>
<p>Even if you can find a lender who will give you a refi with cashout or a large second, where are you going to find the money to pay off the loan? You’re going to be paying interest on that money; you could instead be banking that towards retirement or saving it towards college. Then when your EFC is calculated, your debt won’t be considered. Your loan payments to cover your retirement fund will be assumed to be available to cover college costs. And, incidentally, the FAFSA doesn’t consider home equity, so your EFC will be no lower. </p>
<p>And after all of these machinations, your kid could end up going to a school which doesn’t cover need. Most colleges don’t. There will be a gap between the college COA and what you can afford to pay. All you’ll have out of the exercise is the privilege of paying interest to take out loans to fund your retirement.</p>
<p>co8000 - I think many of us would be thrilled to pay 15K/year. Where did that number come from? But, lets say someone making 70-80K/year would be expected to pay 15K/year, and you’re expected to pay 50K. Don’t you think it’s as difficult for the person making 80K (who probably is living paycheck to paycheck) to come up with 15K for college as it is for you to come up with 50K? </p>
<p>Also, you’re missing the point of the thread. Your family contribution is mostly determined by your income, not your assets. Now, as SlitheyTove has pointed out, you have to pay 50K plus the second mortgage.</p>
<p>We have take home of $75,000 and my daughter’s school wants us to find $37,000 for school (not including d’s stafford loans). Luckily we have savings for the first year. I hope that when they see our savings is 0 for sophomore year, they’ll give us a little more. I don’t mind borrowing $25 grand a year for 3 years on our house but $37 is going to hurt.</p>
<p>As for GTalum’s example, 15K is not 45% of the net of someone making 70-80K per year. </p>
<p>I have spoken with both of the need-based schools to which my daughter was accepted. Both specifically said that they consider assets as well as income. When I questioned how they thought we could pay 45% of our net for her college, the answer from both was exactly the same: “You have assets.” I tried to explain to them that the “assets” were actually nothing more than home equity, but they didn’t care. We have $300,000 in home equity, and virtually no other savings. </p>
<p>As for my example of taking out home equity, let’s say you have $200K in home equity because you were diligent in paying off your house. The CSS/“need based” schools assume you will tap that equity to pay for college. However, let’s say when your child is 13 you take $150,000 in mortgage against the house. Now, for the next FOUR years (very important) you put $33,000 each year into the parent’s retirement, and use the rest to MAKE THE ADDITIONAL PAYMENTS on the extra loan above what you would have had if you hadn’t taken the loan. By putting the max into your 401K/IRA, you also get a huge tax benefit, AND you are getting a bigger interest deduction. Enjoy that by taking some nice vacations. You don’t want to end up with assets. Now, the final year before you fill out CSS, you cut your 401K contributions down, because they ALSO look at that as a factor when they decide your contribution. </p>
<p>When you apply for FA you have maybe $145,000 less in home equity “assets”, but you have $132,000 more in your 401K/IRA’s, AND you saved taxes on $132,000 which probably amounts to at least another $20K. The end result: when you go to apply for FA, guess what? You are now more “needy”.</p>
<p>Let’s say you child doesn’t get into a top school after all of this. You still need money for whatever school. Take the money back out of the 401K at that point and pay for college that way. You only have to pay taxes, because no penalty applies for a withdrawls for education.</p>
<p>Pink Cadillac, i don’t think $37000 is reasonable to expect from a family that takes home $75K unless you have a lot of assets. Our limit, and I am stretching it, is $35K a year.</p>
<p>Sigh. Just in case anyone really thinks that pulling money out of their house to put into retirement to cut down on their assets is a good idea, let’s look at the numbers. </p>
<p>You start with a loan for $150k. Again, getting the loan is a big assumption.</p>
<p>You want to put $33k a year in retirement savings. That’s going to be a total of $132k. You’ll park the money somewhere and earn a few percent a year, on which you’ll need to pay tax. We’ll ignore all that, and concentrate on what is left, which is $18k.</p>
<p>$150k loan at 5%, 10 years to pay off, means monthly payments of just under $1600. That’s around $19k a year. But it’s a home loan. Let’s be generous and assume that you can write off all of the interest, and we’ll treat the entire amount as interest, no principal. And let’s put you in a 33% tax bracket to continue the generous assumptions. Your annual out of pocket cost for the loan will be 2/3rds of $19k, or around $12k a year. The $18k “extra” from the loan (see the paragraph above) will pay for exactly 1.5 years of the loan. After that, you need to come up with the $12k from your budget. </p>
<p>There are no tax advantages here. Since the money wasn’t income or earned interest, you weren’t going to pay taxes on it regardless. This is entirely unlike putting pre-tax income into a 401k or IRA. Your property taxes aren’t affected, since the value of your home is the same. The state or country doesn’t care about your equity.</p>
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<p>Whether or not you make your 401k contribution doesn’t make any difference to the institutional methodology (or the FAFSA, for that matter). The assumption is that all of your income, less whatever they figure is some baseline amount for living, is available for college. Contributing to your retirement accounts is considered a choice. It is your income that determines most of your EFC (or CSS equivalent). Putting the money into the 401k or not makes absolutely no difference to calculating your EFC.</p>
<p>Co8000 - Last year, we got numbers that were not affordable either from one of the schools you are talking about. Even with their “best” scholarship it was significantly more than others. It was easy to cross off the list after the financial aid package came through. I suspect there is no cap on home equity. So, i do understand how difficult and frustrating it is.</p>
<p>Although we have a $110,000 mortgage, we probably have $180,000 in equity, at least according to an appraisal done a year and a half ago. Maybe value has gone down since, I don’t know but I used that value cause it was lower than that equation the profile uses which is really out of date. So I guess they just expect us to borrow or maybe once our savings are used up on year one, they’ll give us more in subsequent years. I did appeal and am waiting on results cause we got a better deal from a very similar school. There we only have to come up with $25,000 after aid. Our EFC was 26,000. Lately though its tough to pay all bills and I have too much on credit cards at times, but schools don’t care about that unfortunately.</p>
<p>“Putting the money into the 401k or not makes absolutely no difference to calculating your EFC” - slithey</p>
<p>As far as I know it does matter because the contributions are pre-tax, so you owe less tax. According to Paying for College without Going Broke, it is better to contribute less and pay more taxes. Somehow paying higher taxes makes the formula work better. Plus unfortunately they consider the contributions as money that should be available to them, but if you have socked it away it’s technically not around to fork over. So one would have to cash out from a 401 k and that is something we are all told never do. “It’s easier to borrow for college than one’s retirement.”</p>
<p>Maybe I’m a cynic, but it seems like the common advice given out favors financial institutions – put as much money into retirement funds as you can and use loans or home equity to finance college educations. Look who is making money off this advice – brokers, banks, and home lenders. College is so expensive anyway and interest charges make it even more so.</p>
<p>1) Taking $150K at 5% in a 30 year refi results in an increase of about 805 dollars per month.
2) Of this, over the first five years the majority of that payment is deductible interest, meaning at 30% marginal rate, about $2700 is coming back through reduced taxes.<br>
3) Putting the $33K into a 401K saves about another $10K in taxes.
4) Over 4 years, your net worth would stay about the same, or rise, depending on the return on the 401K investments vs. interest rate on the mortgage.
5) When CSS profile is completed, your “assets” are about $140K lower. Even at the 5% or so financial aid weighting of assets, which I believe is low based on what I am seeing, Your FA would increase by about $7000 for four years or $28,000. So, you are gaining:
($2700x4 years) + ($10Kx4 years) + ($7000 x 4 years) or about $79,000. The cost is the interest on the loan. Let’s say you keep the loan for ten years, then at retirement you cash out the 401K money you stashed years earlier and pay off that loan, presumably at a lower tax rate. Your total interest over ten years is about $70,000, so you are already ahead even if you assume no gain on the money in the 401K, but optimistically you are going to make money. Not guaranteed, as we all know. </p>
<p>Had I known, I certainly would have done this five years ago. Water under the bridge.</p>
<p>…and maybe a house underwater. Many people who took equity out of their houses 5 years ago are looking at bringing a substantial amount of cash to the table if they were to sell now.</p>
Still better off than I was.</p>