It’s my understanding that the FAFSA/CSS have you count any vested stock options towards your investment assets if the company is public, whether or not the options have been exercised.
Suppose for argument’s sake I had $10K in the bank I could afford to spend exercising shares and that the after-tax value of my vested options was $20K. Wouldn’t it be worthwhile to spend the $10K exercising (with the intention to hold, not sell) shares? These are ISOs, not RSUs, and so the action of exercising would not generate additional income. I’d be left with $20K total assets instead of $30K.
I was under the impression that this might depend on the college, because every CSS Profile college has a different formula as to how they treat different assets. Some colleges permit you to hold more cash than others - that is, they exclude a portion of cash and say it’s not available as your “safety net”. But they don’t necessarily treat investments in stock assets the same way.
Before you tie yourself into knots, make sure you are eligible for financial aid just based on your income and other assets. This discussion could be moot.
Theoretically, someone could work at a start up at a low salary with stock options. And the 10K cash they are planning to use in this plan might represent a big percentage of their total assets.
In reality- someone who is prepared to spend 10K in cash to exercise their shares-- is usually high income with many other liquid assets (i.e. their 6 months salary emergency fund, other investments).
So I’m curious to see what the OP’s financial situation is such that the 10K is going to make a difference between qualifying and not qualifying for aid. Based on my “back of the napkin” calculation- OP not going to qualify for aid. Maybe at Harvard if the family is big. But that would argue against using 10K in cash for the options- a big family even at a high end middle class salary usually needs a cash cushion for other expenses/emergencies.
OP- bring us up to speed on your financial situation.
OP, granted this is hardly an evening when I’m able to think very coherently, but your example is confusing me. The value of an unexercised vested option at any given time is the value of the underlying shares minus the exercise price, isn’t it? Let’s say you have a vested option to buy 1000 shares at $10 each. The shares currently trade at $30 each. Those options are therefore worth $20K. Before the exercise, you have $10K in cash in the bank and $20K in options, for total assets of $30K. You exercise the options, and now have shares worth $30K and nothing in the bank, for total assets of $30K.
@MommaJ - I think what you are missing is that different CSS Profile schools may assess cash vs. other investments in different ways. Suppose in your example that those were your only assets. Some schools might give you more or less aid if 1/3 of your assets were in cash and 2/3 were in stock options, whereas the same school might offer you a different amount of aid if all of your assets were in stock. I think this is the crux of the question that OP was raising. Since all Profile schools calculate aid differently, I don’t think it is possible to give a single answer to this question. I also think we’d need more information to be able to prepare an answer for FAFSA only schools.
^^ - rhetorical answer…I guess it would depend on what you mean by “low income” - it only has to be “low enough” such that, given the rest of the family situation, and the school(s) involved, someone could go from qualifying for now aid to some aid.
In a single-income family situation where the breadwinner earns even under $140K or so, it is quite conceivable that this person may have been granted some stock options. DH earned some a few years ago when our family income was $70K - I am sure others at his company who earned more got more options. If the family size is 4 or more, there are several meet full need Profile schools that give need-based aid to these families, especially when there are not huge amounts of assets available for college. OP is suggesting the difference is not between being a full pay vs getting free ride, but the difference between being a full pay vs. getting some need based aid.
If I were a 70K per year single parent, the LAST thing I would do for my long term financial stability would be to take 10K in cash (which likely represents a large chunk of my savings and emergency fund) and convert it into stock- in the company I work at.
Thousands of employees of Bear Stearns and Lehman learned the hard way that when you lose your job AND your invested assets get devalued over night-- it ain’t pretty. I know people who sold their homes at a loss (because after Lehman blew up the real estate market tanked) AND lost their jobs AND lost the bulk of their assets (all dutifully invested in Lehman stock).
A 70K HOH who would risk long term financial stability for the sake of a modest bump in need based financial aid?
@thumper1 Rhetorical question…who works where there are significant stock options that earns a low income?
Mostly at small tech start up companies who are cash poor but stock rich. We all heard stories of the secretaries at Microsoft or Facebook who got rich when the companies went public. It is this chance to get rich that entices someone to work 90 hours a week for little pay.
