<p>I have a specific question about what the effect of cash is on EFC and what to do to mitigate it.</p>
<p>As background, my brother will be going to college starting in the 2009-2010 year. My parents took out $50K earlier this year (in 2008) from their home equity and have set it aside for investment purposes.</p>
<p>a) Will this be factored into the EFC for when my brother goes to college?</p>
<p>b) If so, what should they do with this money? They are currently planning on putting it into some equity-indexed annuity product (some kind of insurance product tied to indexes, which I am sketchy about as it is, but that's another story), but will that be considered as a liquid asset by FA?</p>
<p>c) Should they just pay down their HELOC? They don't have any other debt aside from their home loan. Or what kind of investment vehicles could they purchase that would not be considered by FA?</p>
<p>Any advice would be appreciated and thanks in advance.</p>
<p>a) yes, cash is considered an asset in the EFC calculation and will be assessed at the rate of 5.6%</p>
<p>b) they can do a lot with this money depending on their overall financial situation and goals. However, if it's needed in the relatively short term to pay for college, then keeping it in a money market account or short-term CD would be the most conservative approach.</p>
<p>c) paying down HELOC depends on the relative interest rate of the HELOC vs other investments that might be made with the money (ie opportunity cost). If the HELOC is at 8% and investing in a CD would yield 1%, then paying down the HELOC is the obvious choice.</p>
<p>There are very few places to park funds such that they wouldn't be considered by FAFSA. Of the 50K, only $2800 will be included in your brother's EFC. There's no reason to try to game the system for such a relatively small amount (I realize $2800 is <em>not</em> small, but relative to the 50K that's available it is).</p>
<p>I can't advise you on annuities, other than to say that your parents must be very sure of what they're buying and what fees are involved.</p>
<p>IFAP</a> - Information for Financial Aid Professionals</p>
<p>check out the exact formula for FAFSA. You can run your numbers. Most couples have $40-50k of asset protection so your parents cash may not matter.</p>
<p>Personally I am not sure that risking home equity in a stock based annuity is a wise choice right now, or ever. I subscribe to paying down the house not taking money out to invest; I have seen too many investments lose money over the years :(</p>
<p>That aside, annuities usually do not count on FAFSA nor does home equity, life insurance, retirement accounts, etc.</p>
<p>Now if you are thinking about Profile schools, that is a different formula, they do ask about equity and retirements and investments; though some Profile schools do limit the amount of home equity they include to a percentage of income, so once more home equity is the safest place for that money- assuming you are staying in that house</p>
<p>What is a profile school?</p>
<p>A PROFILE school is one that requires you to fill out another financial aid form called PROFILE in addition to FAFSA. Many private schools requre PROFILE. There are more extensive questions on PROFILE but the schools that use it tend to be more generous with financial aid.</p>