<p>Having $300K in equity in the house is a major liability for FA. Removing $200K of that would increase FA by about $11,000 (using the “5.6%” figure mentioned). The money would not disappear, it would be put into retirement accounts that do not count against FA. Even if the house went underwater, the 401K/IRA assets are still there as a backstop to bail out the house if necessary.</p>
<p>I think I have made my point. If you have 5-6 years before college, and you think your kid is good enough for a high end “need based” school, refi and take out a massive amount of equity, and stuff every possible dollar into 401K/IRA accounts. If you are over 50 and a two earner household, that is $42,000/year you can hide. You’ll get major tax benefits up front, you <em>might</em> get more appreciation on the money than you would in your house, you’ll get even more tax benefits from deducting the loan interest, and when you apply for aid, the assets won’t count against you. Remember, the equity money is not going away, it is going into 401K/IRA accounts, and if absolutely necessary, it can be removed without penalty to pay for education. </p>
<p>Run the numbers yourself for your own situation. If you are in the $100K-150K earner “donut hole” and you have a lot of home equity, especially if it is in a second property, you’ll be shocked. </p>
<p>Once your student starts school, you are screwed, because CSS schools specifically look at retirement contributions as fair game for educational funding. You need to terminate the massive contributions the year before you fill out the CSS, or halfway through the child’s junior year.</p>
<p>co8000
The cost of your proposal would be 10 years of interest on a $150K loan. Probably more years, because I’m not sure where you would find cash to put back into the house after the college years. </p>
<p>The benefits would be -
Tax deduction for extra contributions to 401K/IRA - If you are already contributing substantially to those, the tax savings is only on the incremental contribution</p>
<p>Tax deduction on interest - if you are in the $100-$200K income range, you are very likely paying Alternative Minimum Tax, in which case interest on the “cash-out” part of the refinance would not be tax deductible.</p>
<p>Increased FA based on decreased home equity. Maybe for some limited number of colleges that use CSS and meet full need and asses home equity at 5-6% your numbers apply, but the 3 CSS/full need schools I have numbers from did not do that - at least, the difference between our FAFSA EFC and the effective EFC in the FA package (COA - FA) was much less than 5% of our home equity. For the very good instate publics we got data from, the COA-merit money was much less than our EFC.</p>
<p>I’m not saying there is no possibility that some family somewhere could come out ahead on this scheme, but it’s far from a lock.</p>
<p>But good luck paying for college and retirement.</p>
<p>I would never take equity out of my home to pay for college (especially at the levels being discussed here.) I have seen way too many people lose their homes in the past two years by mortgaging their home to finance something else - then having the unexpected happen (job loss, medical expenses, business bankruptcy) - and no longer being able to make the mortgage payment.</p>
<p>Point 1: Right. the “cost” of my idea would be 10 years of interest on the loan. 5% interest is the norm right now. Remember these factors: the interest is totally tax deductible, <em>and</em> you will presumably be smart/lucky enough to make at least 5% return on the money while it is in the 401K/IRA. </p>
<p>Point 2: How many people do you know in the 100-150K range stuffing $42K per year into their 401K/IRA? I know exactly zero. In our case, we only manage about $10K per year, so the increment is $32K. I suspect at 10K we are pretty average for this income range with two college age kids. </p>
<p>Point 3: I don’t pay the alternative minimum tax. I don’t even come close. Why? BECAUSE I PAID DOWN MY HOUSE. Guess what? If you don’t have massive interest or other deductions, you have to pay income tax, and a lot of it. My federal hit this year was over $20K, and my state was another $5K, because I have nowhere to hide. Doesn’t seem to matter to the CSS schools though. So, any additional interest is tax deductible at about 30%.</p>
<p>Point 4: I am <em>only</em> referring to “need-based” only CSS schools, and they apparently vary widely among themselves, but I can tell you that the two to which my daughter has been accepted place a lot of emphasis on “assets”, including home equity. A FAFSA school might differ.</p>
<p>Obviously this is not a global strategy, but for families in the 100-150K per year pain zone that have a lot of home equity and time to implement, this plan makes sense. As I said, run your own numbers, but had I known 5-6 years ago, we would be <em>way</em> ahead now. Note that I am not advocating that anyone pull <em>all</em> of their equity out, but if, for example you have $300K in equity, removing $200K of that before your child goes to college and putting it in your retirement accounts makes a lot of sense. The bottom line is that if you <em>don’t</em> do that, the CSS schools will <em>expect</em> you to do it and hand the money to them anyway.</p>
<p>Putting money into a 401 K or IRA does not shield that contribution that FAFSA is examining since you have to add that amount back into your earnings, but having your assets in such an account shield the earnings and those assets in the EFC calculations.</p>
<p>Some PROFILE schools also will give extra consideration to qualified pension plans, though more are looking at them. With such schools, it depends totally on what their policies are. They can ask for the silver in your teeth, and some may as well do so with what they consider.</p>
<p>There are approximately 4000 higher education institutes in the US. Of those, approximately 3650 require FAFSA which, as is well known, does not consider home equity as an asset. </p>
<p>There are approximately 350 colleges that use the CSS profile and/or their own forms and require home equity to be reported. Of those, some unknown percent cap home equity at 110% (Stanford) or 200% (USC?) of income. The [568</a> Group Member Institutions](<a href=“http://568group.org/membership/members.html]568”>http://568group.org/membership/members.html) claim to count home equity, but cap it at 2.4 percent times income minus mortgage debt. Another unknown percent use the Federal Housing Index Multiplier (2006 tables) from the Bureau of Economic Analysis to compute the minimum derived value. This number is grossly out of date but highly advantageous to those who have owned an expensive home for a long time. Some schools publish on their websites how they consider home equity, while for others their calculations are simply a black box. </p>
<p>We’re talking about 8% of the schools in the US who use the Profile and/or who meet 100% of need. The other 92% disregard home equity completely.</p>
<p>Now, co8000 seems to have hit on the .05% schools that take home equity as a large percent of calculated family college contribution. Can you contact those schools and ask that specific question, how is home equity considered? It would be useful information to all of us. </p>
<p>But who’s to say that these schools might not change their formulas in the future? The CSS Profile formula is fluid and can be tweaked by each college that uses it. There’s a growing recognition among colleges that home equity is not the bank account that it was during the mortgage bubble; that it cannot be easily tapped, and that there are good reasons for a family to avoid a cash-out refinance or HEL/HELOC even if they could convince their bank to give them one.</p>
<p>Sorry, I think to go to such financial contortions in order to meet an unknown school’s unknown policy when students are not even close to making a college decision (younger than high school juniors) is not advisable.</p>
<p>5% of $150000 is $7500 per year, so over 10 years it is $75000. If you put the money into a 529 educational account and earned money tax free, over 10 years you would have almost two years of college costs in hand. Then you can pay for your child’s college the good old fashion way - from money you saved. </p>
<p>Your way may make sense on the back of an envelope, but you are still at the mercy of financial aid officers and the 401k returns. After all, colleges don’t have to give you money if you have fewer assets, and 401k returns, as we have seen recently, aren’t always positive. Home equity can also disappear.</p>
<p>“My regret is that we didn’t save more.” mema32</p>
<p>Here, here! I do agree, but when I look back on the last 17 years, I say life and s**t happens. So while I do wish we had saved or been able to save more, there were many things that happened in our life, like accidents and the downturn in the stock market, then economy, that I could not have foreseen. And sometimes when I kick myself for not making more contributions to the 529/coverdell accounts, I realize that had I done that, I probably would have lost most of it in the market crash! So maybe it’s a good thing that I didn’t move more money there! Fortunately, my d has high stats and will basically get a 50% discount at any one of the private colleges she got into. We are okay for the first year and we realize that H and I will have to go the loan route for subsequent years. C’est la vie!</p>
<p>mema32: you are missing the point. 529 money is an asset to a CSS school. Home equity is an asset to a CSS school. 401K/IRA money already in an account is <em>not</em> an asset. </p>
<p>cptofthehouse: you do this far enough ahead of time that the last year you are not putting $42K into your 401K/IRA for the reporting year on CSS. </p>
<p>vballmom: even if your child doesn’t get into a CSS school, there is very little risk here. The $7500 in interest is a tax deduction, and as you feed the loan money into your 401K/IRA, that also is a tax deduction. So, in my case, 30% of the 7500 would come back directly as a deduction, and 30% of the $42,000 would also come back. That is almost $15,000 less in taxes per year right off the bat. Using the 5% asset number, when your child enters school, you would be getting an additional $7500 in FA for four years. If at some point you lose your job or whatever, the money is either in a bank account already, waiting to be fed into your 401K/IRA, or it is in the 401K/IRA and can be withdrawn without penalty for education expenses, which you are going to have unless your child doesn’t go to school at all. You pay taxes at the time of withdrawal, of course, but if you <em>do</em> lose your job you’ll be paying at a lower rate than when you put the money in, and you’ll probably get FA anyway. </p>
<p>The bottom line is that if you make $100K-150K per year and you have done the “right” thing by paying down your mortgage, many CSS schools fully expect you to withdraw that equity to pay $50K+ per year for your student’s education. If you make 100K-150K and you <em>haven’t</em> done the “right” thing, if you have mortgaged your house to the max, you will get FA. It doesn’t matter if you used the equity in your house to live lavishly or if you stuffed the money into a retirement account, you still are “asset poor” and will get aid. I’m not suggesting anyone do a huge cash out refi and blow the money. I suggesting they take the maximum reasonable amount and flow the money into retirement accounts that are not considered to be “assets” by CSS schools.</p>
<p>By “paying down your mortgage” do you mean that you do not currently have any mortgage payment? Because that is a specific question on the CSS Profile, so if you have $0 or $low there, they may expect you to pay more for college. Without seeing the school formula, it’s impossible to know how they calculated your aid, but that could have been a factor. </p>
<p>I think we can all see how your proposal might, in retrospect, have worked for you. The lack of enthusiastic endorsement has to do with the fact that it depends on a particular FA calculation that is not typical or common. Most of us have a hard enough time in October of Senior year figuring out which schools our kids will apply to, which schools will accept them, and what the range merit and need-based aid will be. Making an assumption 5 years ahead of time, and putting in place financial contortions based on that assumption doesn’t sound all that appealing to me. YMMV, as they say.</p>
<p>Some schools do look at 401k assets. BC says so right out. Actually all PROFILE schools look at the numbers. Why do you think they ask for them? But most won’t use them if they are within a certain amount. </p>
<p>As to the small percentage of schools that use PROFILE, though it does look like just the sliver of the whole pie, that is where the richest filling is concentrated. I don’t know more than a school or two that guarantees to meet full need using FAFSA only. THe schools that tend to give the richest fin aid packages are in that tiny % using PROFILE. Also, if your kid is looking at a certain type of school, small LAC, top ranked school, rep is very important, then you are really focused on those schools. </p>
<p>Anyone who wants/needs financial aid should really vary the type of schools in their basket. Those with low incomes and high caliber students could do much better with those PROFILE schools over some state schools. My friend from PA got a big fat $2K from Penn State, their state school, and nearly a full ride from some LACs and privates. Her worst package from a PROFILE school comes to $5K more than what Penn State would charge. Clearly that was a rich source of college funds for them, and those schools are more what the student wants. But it would not have been wise for that student to have counted on those packages, and it was a good thing to have had the state school and a local option in the mix along with some schools where she was pretty sure to get some substantial merit money.</p>
<p>I did not miss the point; I was making a new one. Which is yes, you can shift your money from home equity into 401k accounts so that you appear to have more financial need, but it is not a guarantee that you will get aid. Colleges can chose not to give you money, you can get a big raise which will put you out for range for any financial aid, your child may decide not to go to college, anything can happen. Meanwhile a major portion of your net worth is at the mercy of a capricious market and 401k administrators that nibble away at your money with fees and admin costs.</p>
<p>A second point - Why is it that people of means cannot plan ahead and save money for college outright? Why expect the colleges to pick up the tab? Yes I know the life happens, we too have had up and down years, but its not like we didnt see these college years coming. We have had 18 years to plan.</p>
<p>MomofJandL: My point exactly. We have a very low mortgage payment, and the house is almost paid off. If we had been extravagant and bought a huge house with a huge mortgage, or refinanced and taken out equity, we would have been better off. </p>
<p>Now I face having to crush my daughter’s dreams and all her hard work by telling her she can’t go to either of the schools she worked so hard to get into, visited, loved, and which others in her class <em>will</em> attend. It is pretty hard to tell your daughter that the family of the kids she knows who will attend, who drive nice cars, and live in giant houses will get FA, and because we don’t “qualify”, she can’t attend. </p>
<p>I think my biggest complaint through all of this if how obtuse the websites and admissions people are at both of these schools about financial aid. They both said aid is “need-based” and that “the vast majority” of students get FA and get out of their schools without massive loans. With a gross around $150K and a school cost of $50K+, we thought there was no way they would ask us to pay the full amount. We went on our merry way thinking we would be asked to pay a huge amount like $25-30K, but we would sacrifice <em>everything</em> to make it happen. Now we are told we have to pay $50K+, which is just impossible. If they had told us that up front, we wouldn’t have bothered visiting, applying, and thinking they were candidates. </p>
<p>This is why I am <em>warning</em> other families in the $100K-$150K family gross income range. You are <em>expected</em> by these schools to liquidate home equity to send your children there. If you are not willing to do that, don’t apply.</p>
<p>What about transferring some assets to a personal annuity (for an older parent)? Would these contributions “count” in terms of financial aid in the year they are made?</p>
<p>One of the most heartbreaking things on this board is when both the kids and parents have held up their ends of the bargain, and the numbers still don’t work out right. The kids work hard, get the grades, test scores, and the rest, and score acceptances. The parents have saved, and are prepared to pay for their kid. And then the FA award letter comes, and it just doesn’t fit with the budget. </p>
<p>D1 is seeing this among her classmates, where kids with acceptances from tip-top dream schools are sending in deposits to Berkeley or (thanks to big merit aid) USC. The kids are disappointed, but realistic. They have younger siblings, or they know that they want to go to grad/professional school, and they can’t justify their parents taking on significant debt. And they know that they are going to be attending wonderful schools, regardless. Others are sending in their deposits to their dream schools either because they’ve gotten good FA news or because their families have the good fortune to cover full pay. Life happens. It’s not always fair, but we figure out how to make it work when it’s not.</p>
<p>Some of the best advice that I’ve gathered from reading CC is to have the money talk about college with your kids sooner rather than later. We all want to reward our kids for their hard work, so we tell them that they should worry about getting in, and we will worry about paying for it. Or we want to inspire them to do their best, so we tell them the same thing. It feels almost disloyal to tell a youngster that it’s going to depend on both them getting in AND if the money works out, but perhaps that’s the best thing to tell them. Their hard work still matters, because it can make them desireable enough to garner merit money along with acceptances. And we can help them prepare to keep their options open, because need-based awards vary so much between schools.</p>
<p>I don’t know where you live, but in some areas of California you would have seen the value of your home reduced by half in the years between 2008 and 2011. You would now owe more than your house is worth. Assuming you still had a job, you could continue to pay your mortgage and hope that its value eventually returned to where it was when you bought it. Or you could sell the house and liquidate your 401k or IRA to pay off the portion that you were underwater.</p>
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<p>Colleges don’t expect anyone to liquidate home equity. They have a blunt instrument called their need-based financial aid calculator. They also have a fine-tuned instrument called their merit aid awards. Using these, they can choose to offer a family some amount of aid based on their assessment of the family’s need and how desirable the student is to the school. Schools expect that a high-income family with significant assets have the means, through savings, current income, and future loans, to pay for college.</p>
<p>It would be helpful if need-based financial aid could be calculated by each family prior to submitting an application, rather than having this be a black box at many CSS Profile schools. This will apparently be more available on colleges’ financial aid websites in the future due to new Federal rules. However, as has been discussed on this board many times, there are so many variations in families’ financial situations that a one-size-fits-all calculator isn’t necessarily a panacea.</p>
<p>The CC mantra is to have at least one financial safety, defined as a school that the family knows is affordable and to which the student would be willing to attend.</p>
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<p>Annuities are one of the few ways to change a reportable asset to a non-reportable asset under the FAFSA rules. CSS Profile colleges might still request that they be reported.</p>
<p>There is virtually <em>no</em> merit based aid at the top 30 privates. It is all “need-based” because virtually every student is worthy of merit awards. </p>
<p>My daughter has applied for over three dozen private scholarships, but the vast majority are $500-$2500 type awards, for one year. These would not even put a dent in the situation. One of the conundrums of private scholarships is that many want to know which school the student will attend, but the awards are not announced until after the May 1 drop dead date. </p>
<p>So parents, be careful what you wish for when you try to inspire your student, because unless you are lower-middle class or very rich, you may be in for a rude awakening.</p>
<p>BTW, I was told by FA counselors last week at both my daughter’s top CSS-based LAC’s that home equity <em>was</em> part of the FA equation. If you have significant equity, they fully expect you to tap that equity through loans.</p>
A true statement for most of the top 10, but those just below that level (Vandy, Rice, USC…) do offer substantial merit awards. They are not easy to get, but for example Rice offers merit to ~30% of its entering class (several are full tuition awards but many are quite small).
Private scholarships can help full pay students, but if you have any need-based money the college will use them to reduce your need. Some colleges allow you to use a scholarship to reduce workstudy and summer earnings (and so you still benefit), but many do not.</p>
<p>I think there is a “donut hole” (as some people have talked about) when it comes to affording the full price for private colleges, and we can’t always assume that people who seem to have the means to afford the full sticker price for college really always can. There are those who are “too rich” to qualify for financial help, but in reality really not rich enough to afford to be full pays either: Those people who have only recently started making a good income, for instance, or didn’t have the means to save earlier on or who were paying off student loans themselves, struggling with medical issues, a special needs child, layoffs or the like. Many people also work in industries now where they will get no pension upon retirement. And in some cases, mom may have just gone back to work. The income looks really good on paper, but it’s a recent development. And, yes, sometimes people are in fact being penalized for paying off their mortgages and living more frugal lifestyles instead of sending their children to private K-12 schools, buying the more expensive cars or the like. </p>
<p>As someone who is still relatively new to CC, I just want to say that I’m very grateful for those share their stories here and put themselves “out there” for public dissection on this board to help us learn about the ins and outs of financial aid. </p>
<p>There are many inequities in this system from only the custodial parent being looked at in the FAFSA system to FAFSA not counting retirement assets or pension benefits, and I’ve learned that things are not as black-and-white as they may have seemed before I found CC. It’s been very eye-opening. </p>
<p>Did anyone see the Suze Orman Show the other night where she told a woman with about $1.5 million in assets (that included retirement) that she couldn’t afford full pay for Princeton for both of her daughters? I’m still not sure what I think of that one. :)</p>