Is this correct? Financial aid questions.

Parent Cafe
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<p>Two things I have been told recently that I am not sure are correct. D is a HS junior, and I have been advised that I should take out a second mortgage (first mortgage is approx. 3/4 paid off) to pay off all other debts (some credit card debt and one car loan) because doing this will increase the amout of need-based aid we might get from a non-FAFSA-only school (sorry, I know there is a name for those schools but I can't recall it). From what I can tell so far, D is likely to qualify for some small amount of need-based aid if she goes to a pricey private school (income is about $125,000, home equity is about $200,000). </p>

<p>Also, I have been advised that if any relatives are willing to contribute to the cost of college, we must disclose those people's assets to the non-FAFSA-only schools. D is likely to get some assistance from grandparents but will I really need to disclose this to the financial aid offices?</p>

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<p>I believe you are talking about schools that use the CSS Profile and the institutional methodology to compute financial aid awards. These schools require the FAFSA also.</p>

<p>First. I would suggest you post this question in the financial aid/scholarship section of this forum.</p>

<p>Home equity at most of these schools has a cap of some sort…varies from school to school. </p>

<p>Just my humble opinion here…I would never advise someone to take out an additional loan when they have college costs looming in the near distant future. </p>

<p>Re: assistance for your child…it depends on how this money is received and when. Many folks suggest that the grandparents (or whomever) save their money and pay off the college loans for the student.</p>

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<p>Increasing the amount of debt on your home should increase your deductible expenses (interest.) Interest paid to a credit card or car loan comany is not deductible. The impact of increasing your debt to equity ratio in your house will probably be small, but still helpful. </p>

<p>Avoid any transfer of funds that will show an increase in assets in the student name. If grandparents are willing to help, you may find it more beneficial for them to transfer to you within the gift tax limits and help pay your EFC. You may also consider borrowing the money from the grandparents as opposed to receive it. Later on, this could be reversed via gifts. </p>

<p>I do not think that the assets of grandparents need to be disclosed, but any funds they disburse directly to your children will have an impact.</p>

<p>Asking the right questions before it’s too late is smart.</p>

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<p>I recommend that the grandparents set up a 529 plan. They can put in up to $55,000 each in the first year. The assets are still theirs and don’t need to be disclosed on either PROFILE or FAFSA and the earnings will grow tax free.</p>

5

<p>Xiggi, as usual is right on. These things are all considered smart planning. THough your income and assets may not get you any federal grant, some manuevering can make you eligible for college money from the schools themselves.</p>

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<p>Beware of a group called College Funding that advises taking a second mortgage and purchasing life insurance from them. They do not readily disclose that is what they are selling.</p>

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<p>“I recommend that the grandparents set up a 529 plan. They can put in up to $55,000 each in the first year. The assets are still theirs and don’t need to be disclosed on either PROFILE or FAFSA and the earnings will grow tax free.”</p>

<p>Be careful on this one: verify how each college will handle this; questions regarding 529 funds may be asked on the CSS Profile Supplement for that school.</p>

<p>In general, you will want to be able live as cheaply as possible while your child is in college. Paying off consumer debt and the car loan is ok - but beware the amount of time it takes you to repay it on a equity loan / line. Of course, once the kid hits college, it gets harder to pay off debt.</p>

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<p>Getting a second mortgage might be a wash or actually hurt. If you get a 2nd mortgage, your liabilities increase, but so do your assets, and the significant increase in cash or equivalent may have more impact than the increase in debt.</p>

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<p>“If you get a 2nd mortgage, your liabilities increase, but so do your assets, and the significant increase in cash or equivalent may have more impact than the increase in debt.”</p>

<p>This would only be true if the school doesn’t count equity in the primary residence - Princeton doesn’t (someone correct me if I’m wrong) but I think most other Profile schools do.</p>

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<p>This is not true in the case presented by the OP. The cash raised by the second mortgage goes to payoff other debts. This amounts to move a liability to another liability.</p>

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<p>If grandparents or others want to help, giving directly to the parents is much better than sending that cash in the student’s bank account. If you expect even a penny of need based aid, don’t let Grandma send the money directly to the school - that would only reduce your need.
Gift tax limits are rising; for 2007 it was $12,000. Rich relative can give you more, but they have to keep track and reduce their tax free estate by that much later. Heck, if you have someone willing to give you $12,000 per year - count yourself blessed. (for the really lucky, that person can give you and your spouse each $12,000… and if a married couple - say Uncle Hardwork and Aunt Frugal - want to, they can each give you $12,000 and then each give your spouse $12,000 before Uncle Sam needs to be involved. Colleges might start to get very interested however!)</p>

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<p>Customer debt doesn’t factor into financial aid. If you have 100k in the bank (lucky you) and 30k in car loans and other debt, you have 100k in assets.</p>

<p>If you pay off the car and credit cards, your assets are reduced to 70k.</p>

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<p>Thanks for all the replies. I think I get the general idea. A more specific question now. Given that a home equity loan is not free (costs and interest) does anyone have a guess as to the dollar amount of a “trade” (trading car and credit card debt for diminished home equity) it would take to be worth it? For example, if I were only going to take out a home equity loan for $5,000 and pay off that same amount in credit card debt, I can’t see that the diminished EFC would be worth the cost of the loan. But if I took $100,000 out of home equity, and paid off an equivalent amount of credit card debt, then I imagine our EFC would be reduced fairly substantially. The actual car loan and credit card debt is closer to $5,000 than to $100,000–I just picked those numbers because they seem easy to me. But at what point between $5,000 and $100,000 might it make sense to actually do this?</p>

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<p>Talk to your bank about fees and such. In some cases a home equity line-of-credit is cheaper. We can’t answer all these questions because some depends on your bank.</p>

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<p>You may be able to hide some assets, but what about the income? Run the numbers on the income only with no assets and see what the EFC is.</p>

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<p>For comparison, we’re at 105K (with 401k contribution back that puts it at 115k), 4 family members (including grandpa), home equity at about 110k and a pathetic amount in savings - grant was 15k last year. </p>

<p>So, depending on the college, the OP might be looking at anywhere from 0 in grants to over 20K depending on the school and whether the finaid officer had a fight with her husband the night before. </p>

<p>Oddly, the thing that makes ME feel better is taking a loan, or fixing a portion of my HELOC because then I know what the money situation is. I am currently trying to decide between one more dip into equity or a PLUS loan (which are less risky in some ways) for my son’s 4th and final year.</p>

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<p>Also, once you take OUT that home equity loan, you do have to pay it back. Factor in your payments. Most home equity lines (are you planning a “line” or a “loan”) require that you pay at least the interest every month. A home equity loan requires that you pay both interest and principal every month beginning when you take the loan. Do you want to pay the college or pay the bank??</p>

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<p>One thing that continually seems to getting left out of these discussions. The universities are using need based money to BUY the best and brightest regardless of economic factors. That is why so many of them are turning to need blind admissions. The simple formula for a lot of them is TCA less EFC equals need based money at the 100%'ers. If a school isn’t offering what you think they should it isn’t because they are stingy or anything like that. Perhaps they aren’t a 100% school and your child isn’t at the top of their list. If they were and they wanted them to attend no matter what they would have offered the needed aid.</p>

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<p>Ohio mom - thanks, I don’t know how to edit the post - I went back to our profile documents - there’s a question - "Enter the amounts you expect to receive from your relatives and all other sources (list soures and amounts in explanations/special circumstances). From a student income question it seems as though these amounts will be added. From an asset standpoint, I don’t see where a grandparent’s assets (529s included) need to be disclosed, unless there is a school specific question that we did not have.</p>

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<p>As I see it here, the OP is trying to manage a couple of things.</p>

<p>First, the management of assets vs. certain categories of debts. On this count, as other posters have mentioned, consumer debt hurts you in FA analysis as it is not included in net asset calculation, whereas mortgage debt helps in most Profile situations, as it does decreases your net assets (for schools who include home equity).</p>

<p>The second thing which I see needing to be discussed is cash flow. Right now has a mixture of consumer debt that has varying payback schedules over the next 3-? years. OP is considering whether to use home equity debt to not only affect the FA estimate, but I would also assume to lower payments freeing up more current cash flow for college EFC.</p>

<p>I see 3 ways of using home equity to address this consumer debt which can be used singly or in combination. I’ll list each with pros/cons.</p>

<p>1) 2nd mortgage - that is fixed amount at a fixed rate for a fixed duration. Pros - You know exactly how much you will be paying and for how long. Doesn not extend the life or terms of your current mortgage. Cons - It is a one time shot that usually has fixed fees associated with processing. If a “3rd” mortgage is needed later, it just adds to the cost. Probably a higher initial interest rate than other loan products.</p>

<p>2) Home Equity Line of Credit (HELOC) - Pros - Usually has a lower initial rate. Usually have minimal (or sometimes no) fixed upfront costs. Allows borrower to take out additional debt in only the amount needed (for up to 5 years usually) with minimal (if any) transaction cost as it is needed which can be very useful for paying debt that accumulates over time (like college tuition!). Most allow interest only payments during the debt accumulation period, minimizing borrower cash outlay. Usually converts to a fixed rate (based upon an index) once the debt accumulation period ends. Cons - Variable rates during debt accumulation leave uncertainty of monthly payment. Final rate set in future (at end of debt accumulation period based upon an index) highly likely be higher than a fixed rate today. Maximum payoff term may be shorter than 2nd mortgage (check with lenders for specific programs).</p>

<p>3) Refi current 1st mortgage (fixed rate) - Pros - If you are significantly into your current 30 yr mortgage (10 years or more), you will lower your monthly payment on ALL of your debt, not just the consumer debt. Overall interest rate on total debt will probably be lower than any other method. Overall monthly payment will be lower than all other methods during the college period. Cons - you will be paying for your home mortgage a lot longer. May require more paperwork up front or more fees. If your original mortgate was taken out at the lowest rates in the last 10 years, you may actually not save money, but you need to do the math to figure this out.</p>

<p>Personally, if you are committed to using your resources (income and home equity) to finance your share of the EFC (hopefully you’ve followed other advice on CC and gone through the EFC Calculators and added a bit for “gapping” or required loans in FA packages), I would probably do a refi now (if the math works correctly - rates today compare favorably or equally with your current rate) and when you come to the point in college where you cannot fund your child’s tuition bills out of cash flow or subsidized loans, go with an HELOC (given the rates compare favorably with unsubsidized educational loans). If in the time before college starts, your payments have dropped to the point where you have excess cash flow, you can either make additional principal payments (shortening the refi’d mortgage - it doesn’t take much to chop off a couple of years) or just accumulate the cash in liquid form anticipating the payments of the first year tuition and delay the time you need a HELOC.</p>

<p>More importantly, you need to change your spending behavior to not require consumer debt going forward, as it indicates that you are spending more money than you are taking in - a bad sign for the future.</p>

<p>Hope this helps.</p>