paying off debt...

Paying for College
1

<p>Sorry if this is a really dense question in advance.</p>

<p>I'm in my freshman year at a private LAC that meets 100% need and my family applied for aid but didn't receive any (besides Stafford loan) because we have ~3 years' tuition in liquid assets. This money is going to be gone next April because that is the soonest they can pay off the mortgage on their rental property but obviously this is NOT before we will be filling out and submitting FAFSA, CSS, etc. Given the current financial climate is there any chance that we would qualify for additional aid if we contacted the FA office directly after paying off the debt? When we plug numbers into the EFC calculator at finaid.org our EFC goes down about $10k which is a hefty amount. Or should we talk to the FA office beforehand to get an idea as to whether this would have any impact or not? Or will we just have to wait until next aid year (ie. my jr year) to hope for any change in aid?</p>

<p>Thanks for any responses.
- collegekid142</p>

2

<p>I don't understand why paying off the debt would reduce your EFC at all. It certainly will not for FAFSA as FAFSA does not treat liquid assets and non liquid assets any differently at all. (not sure about CSS). A rental property is a reportable asset. If you have a debt against the rental property the reportable value of the property is reduced by that debt. If you use cash in the bank to reduce that debt the cash asset is reduced but you must increase the reported value of the property. It is a wash. Your reported assets stay the same. </p>

<p>For instance if the property is worth $250,000 and you have a $100,000 debt against it then the reportable asset is $150,000. If you have $125,000 in the bank then your reportable assets are $275,000 ($150 from the property plus $125k from the bank). If you take $100k out of the bank and pay off the debt your reportable assets are still $275k - $250 for the property plus $25k left in the bank. </p>

<p>I doubt any financial aid officer is going to be willing to make any changes because you are planning to use cash in the bank to pay off a debt rather than pay for school. </p>

<p>Now for FAFSA if you were paying off the mortgage on your primary home it would make a difference, if the cash is used to pay off the debt before you file FAFSA. This is because, for FAFSA, the primary home is not a reportable asset, while the cash in the bank is.</p>

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<p>Out of curiosity I ran some made up numbers through the finaid EFC calculator using using Institutional methodology (I already knew how the outcome would be for federal). Moving assets from liquid to non liquid assets made no difference to the EFC. $100,000 in liquid assets is treated the same as $100,000 in other investments. When you plugged the numbers in did you remember to increase the value of 'other investments' to reflect the increase in value due to the reduction of the debt?</p>

<p>The only way I can see it making a difference is if you were reporting the rental property on FASFA as a business - but generally real estate is not allowed to be reported as a business asset unless it meets very specific guidelines.</p>

4

<p>it will effect the FAFSA efc if they spend their savings (assuming the amount of their savings is over the protected amount). It sounds like they want to spend about 83K in liquid assets that are beyond the protected amount. (I figured that number based on the fact that they assess your available assets at 12%) 83000 * .12 =10000</p>

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<p>But they are talking about using the savings to pay off the debt against another reportable asset. Decreases the value of the first but increases the value of the second by the same amount. So it is a wash as far as I can see.</p>

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<p>oh I missed the part that they were paying off a rental property. My bad.</p>

<p>Having never owned a second home (!) I didn't realize that you reported that on the Fafsa. I am actually considering on pre-paying my next several mortgage payments to burn off some cash early (It's not like I'm selling the house in the next few months). And I'm not having my income tax return direct deposited so it won't be sitting there in the bank when I do my fafsa. </p>

<p>Now if the EFC formula gave asset protection of a single parent more fairly (imo) than a married couple, I would be under the asset protection limit.</p>

7

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<p>Sue and Swimcats are right, I believe. Paying off a rental property will simply increase the equity available for that property. On the FAFSA, rental properties ARE reported. The value of that property is considered in the calculation. If you have a mortgage against that value, it would reduce the equity available to you. A completely paid for property would have a nice amount of equity that your family could tap...or they could sell the property to pay for your college expenses. </p>

<p>I'm sorry, but I don't see the advantage of paying off the rental property. Yes...it will reduce their "liquid assets" but it will INCREASE their rental property accessibility for financial aid purpose. I agree...it's a wash.</p>

<p>Also, you say you can't do this until April. Your financial aid info for the 2009-2010 year is based on information the date of your filing of the forms. SO if you file to meet the deadlines, your family will NOT have made that change. It won't matter until next year, and I seriously doubt that the financial aid office would consider early payment of a rental property mortgage to reduce savings as a "special circumstance".</p>