Seeking Help on Key Financial Planning Decision

Paying for College
1

<p>I am hoping to hear from someone who has been through a similar decision point. I hooked up with a funding advisor company who advises me to shift all my savings/assets into a liquid, safe life insurance type investment, which would be shielded from the EFC calculation. (It is a legitimate insurance product; checked it out. FYI guaranteed rate of return would be 4%) I would take a 10,000-12,000. penalty/tax hit to do so by retiring my 529 account. Specifically, here is what they want me to do:</p>

<p>Retire/move my 529 balance ($110,000 saved so far)
Retire/move my Mutual funds ($55K saved)
Sell all Stock shares I own and move
Re-finance my house, take out $100,000. more in cash, and invest in insurance product.
Contribute to the insurance investment monthly for the next 6 years versus contributing to my 529 account.
They estimated my current EFC to be $47,000. and felt the tactics above would lower it 35,000. (less when my second daughter enters school)
I earn $149,000. per year, have $160,000 saved so far for college, and estimate I could maybe get to $300,000 saved to apply to both my duaghter educations (Age 14 and 16)</p>

<p>I am trying to plan for the "worse case" - private schools, no free aid given to me; therefore figuring I need about $200K per child, $400k total. At my current pace, I think I can get to $300K in savings. barring a job loss etc.</p>

<p>The tactics they outlined are designed to get my EFC down and put me in a position to get grants or free aid. I am concerned that I would all of the asset shifting, with no guaranty of any free money, based on my higher income level. Thoughts? Thanks.</p>

2

<p>OK - personally the whole idea horrifies me. I will admit I am not a financial advisor or expert in any way but this is my personal opinion. </p>

<ol>
<li><p>1st try running your numbers (income, assets etc) through one of the financial calculators - finaid has a good one <a href="http://www.finaid.org/calculators/finaidestimate.phtml%5B/url%5D"&gt;http://www.finaid.org/calculators/finaidestimate.phtml&lt;/a&gt;&lt;/p&gt;&lt;/li>
<li><p>With your income of $149,000 (which will probably be higher in 2 years) your FAFSA based EFC is going to be pretty high anyway - based on a family size of 4 with one in college and no assets your EFC is about 40,000. So way to high to qualify for any sort of federal aid. Private school use profile and the EFC is often higher.</p></li>
<li><p>School Aid is not in the form of all grants - it may be all loans, loans and work study, you may be 'gapped' (i.e. not all schools meet full need - many have a gap). Read through some of the postings on CC and you will see that many people are surprised by their aid - not in a good way. </p></li>
<li><p>If you tie up your assets in this way how are you going to pay your EFC? If it is $35,000-40,000 a year - out of your income? </p></li>
<li><p>When is the money from this insurance available to you? On your death? A cash sum when you reach a certain age? You are talking about tying up a current asset value of $265,000 (including refinancing your house!) to try and reduce your annual EFC, by their estimate, by 12,000 a year (so maybe making you eligible for $72,000 to $96,000 of aid) . But you have no guarantee that you will get free grants to replace that 12,000. </p></li>
<li><p>How is the house market in your area? If it is good you house value may increase enough to increase your EFC (if primary residence is taken into account - under FAFSA it is not)</p></li>
<li><p>Check into whether theis liquid insurance type investment is really protected from the EFC calculation. Private schools use profile which look at everything down to what you paid for your car - insurances with a cash value may be something they look at.</p></li>
</ol>

<p>Please think very carefully before you make such a move. Do a ton of research. Read through CC and see what sort of financial aid people are getting. look at some schools and see what sort of financial aid they offer. Consider how this may affect you if some major change happens in your life (illness, job loss etc). Look into other ways of maximising your aid - again finaid has some good tips @</p>

<p><a href="http://www.finaid.org/fafsa/maximize.phtml%5B/url%5D"&gt;http://www.finaid.org/fafsa/maximize.phtml&lt;/a&gt;&lt;/p>

<p>Personally i would run very fast from this idea.</p>

3

<p>The investment must be a retirement account if it is "shielded" from the EFC. Otherwise isn't it a regular asset?
And don't forget your kids could still get merit aid.
I agree with swimcatsmom...</p>

4

<p>Is the insurance policy a variable life insurance policy? Finaid has some information about such a policy. </p>

<p><a href="http://www.finaid.org/savings/variablelife.phtml%5B/url%5D"&gt;http://www.finaid.org/savings/variablelife.phtml&lt;/a&gt;&lt;/p>

5

<p>"
Personally i would run very fast from this idea."</p>

<p>me too. 529 has very low tax, or almost no consequences. The insurance product may have tax consequences. Home equity also grows tax free.</p>

6

<p>Grant-based aid to meet your FAFSA EFC is NOT guaranteed, anywhere. Even colleges that claim to meet 100% need do NOT base that promise on the FAFSA EFC -- and meeting need is often in the form of loans and work-study. My daughter's aid package at Univ. of Chicago, supposedly one of the better 100% needs schools, included a $5000 "university job" that was not even protected work-study income -- and can you imagine how many hours a student would have to work in a school year to earn $5K? </p>

<p>Colleges are asking more and more each year about assets & income not reflected in the FAFSA. In general, only the most selective colleges promise to meet full need in any case, and college admissions is really tough these days -- your kids are very likely to end up attending a college that "gaps". </p>

<p>I have said this before and will say it again: I have run the numbers every way possible, and a person is always better off to make more money and have more assets and spend more for college than to have less and spend less. That's because even though the EFC takes a big bite out of earnings & assets, it doesn't take it all. If you have $10 and spend $6 of it, you still have more money than someone who starts with $5 and spends $3 -- which is pretty much how the system works. </p>

<p>The best advice is to maximize use of any vehicle that shelters money: IRA's, Keoghs, health savings accounts, and 529s -- they all get preferential treatment in the end. </p>

<p>Oliver, with your financial position you will definitely be able to afford college. No matter what, you always qualify for a PLUS loan to pay up to the full cost of attendance -- so if you are in a situation where you have $300K in savings and need $400K for college costs, you will be able to leverage that $300K to $400K with a very moderate amount of parental borrowing, that you will probably be able to pay off very quickly once your kids are out of college and you don't have to support them. Also, just because you are "rich" doesn't mean that you have to provide 100% of your kid's education - you have every right to insist that your children take paying jobs to contribute toward their college expenses. At the very least, your kids should be able to earn enough to meet most of their incidental expenses and to buy their own books. Even if your EFC is high, your kids will be eligible for unsubsidized student loans -- you could require your kids to take out the loans with the understanding that you will make interest-only payments for them during the college years but they will take on the responsibility after graduation. </p>

<p>Bottom line, if you want to end up rich, the best thing you can do is make investment choices that maximize the amount of money you can save. Any scheme that involves making yourself poorer in order to qualify for more financial aid is just self-destructive -- I mean, if you quit your job and sell your home and then transfer all your money to me, then you might qualify for food stamps.... but that would be kind of stupid.</p>

7

<p>yeah, but he wants to maximize his share of 'free' money.</p>

8

<p>There won't BE any free money - not unless your kid qualifies for merit aid - so Forget About IT. Seriously, do NOT do what you are being advised to do by the insurance company. Stay the course!!! You never even know what your kids will want to do - you may have one child who wants to attend state U with honors college and merit scholarships (at a cost of $9,000 a year to you.) You could pay that out of pocket and still have money left over to buy a BMW!!!!! DON"T DO IT!!!!</p>

9

<p>I only wish I had your problems! </p>

<p>But really -- every parent is trying to figure out how the system works and I don't blame anyone, even those making tons of money.</p>

<p>Here are the things I would consider -- </p>

<p>schools that use the profile, not FAFSA, may still take your assets into consideration -- even if they are "shielded" if they suspect that you are trying to hide/protect assets simply to get aid. </p>

<p>When the student already has a high EFC, the majority of the aid may well be in the form of a parent plus loan, unsubsidized stafford loans and work-study. You may not be any further ahead.</p>

<p>I would suggest that you maximize your children's opportunities for merit aid.</p>

10

<p>Agreed, Run, run away fast!!</p>

<p>When in doubt follow the money. How much do you figure your "financial planner" will make (his commission) for helping you out with this crappy scenario??</p>

<p>Even with no assets your income will drive EFC.</p>

11

<p>It is nearly impossible to plan in this manner so far out....what works today can easily be changed tomorrow. Financial Aid regulations are an ever-changing world governed by whomever is in control of Congress. Banking on current regulations regarding income and assets could result in worse FA woes once your children enter school...and the FA crystal ball has not worked properly in at least a decade.</p>

12

<p>And do you really want to take a guaranteed $10-12,000 tax hit without any guarantee of scholarship or merit aid? As noted before, the rest of the aid is not "free".</p>

<p>(And while the insurance product may be legitimate, I have never heard of an insurance product that's a good investment.)</p>

13

<p>I did think this new law may be helpful for those who have too much money for need based aid. I have not had a need to do this yet so I have not totally checked it out but it's pretty interesting.
<a href="http://talk.collegeconfidential.com/showthread.php?t=296548%5B/url%5D"&gt;http://talk.collegeconfidential.com/showthread.php?t=296548&lt;/a&gt;&lt;/p>

<p>I absolutely would not go along with original plan you are talking about. Never take a tax hit like that.</p>

14

<p>Let's see.. I do this for a living (of sorts) so let's look a bit closer...</p>

<p>" I hooked up with a funding advisor company who advises me to shift all my savings/assets into a liquid, safe life insurance type investment, which would be shielded from the EFC calculation."</p>

<p>Yes, life insurance cash values are exempt in FASFA calcs. Most life products are safe along the lines of a gov bond or AAA bond (with similar returns), except for variable or universal life (anything that has a monthly charge for insurance and accumulation account. Those kinds can fold up down the road. </p>

<p>" I would take a 10,000-12,000. penalty/tax hit to do so by retiring my 529 account."</p>

<p>this would be a red flag for me. I would need to see why I need to eat 10k to do better? This is similar to the roth vs traditional IRA debate... does it pencil out in all markets.. not just the hypothetical 12% return one. What about a minus 12% market? </p>

<p>Specifically, here is what they want me to do:</p>

<p>Retire/move my 529 balance ($110,000 saved so far)
Retire/move my Mutual funds ($55K saved)
Sell all Stock shares I own and move
Re-finance my house, take out $100,000. more in cash, and invest in insurance product.
Contribute to the insurance investment monthly for the next 6 years versus contributing to my 529 account."</p>

<p>They certainly are swinging for the fences here, not too shy about it. They are trying to get around the MEC issue that changes the tax status of life insurance due to overfunding. YES, folks life insurance is subject to an IRS rule that prevents too much accumlation because you can get the money out tax free. It used to be sold by stockbrokers all the time as single amount guaranteed investments... Give me $250,000 and I will give you 15,000 tax free the rest of your life and if something happens to you, we will give your family one million dollars tax free... Life insurance used to be the best tax scam in the country... used to be. Some of their advice is an attempt to get around the modified endowment contract (or 7 pay test) </p>

<p>What type of life insurance are they reccommending? </p>

<p>The tactics they outlined are designed to get my EFC down and put me in a position to get grants or free aid. I am concerned that I would all of the asset shifting, with no guaranty of any free money, based on my higher income level. Thoughts? Thanks. </p>

<p>I think your concerns are very much warranted. I wouldn't do this and I'm in the business. I own cash value life insurance and it is all they say it is. They are correct in many things they imply. However, all that really happening here is you are subsidizing a sales convention trip for this agent. I don't like to have clients take a loss (especially 10k) to fund a new venture. </p>

<p>First, do you need more life insurance? Have them run the senario where you just add life and fund it only over the next few years.. what does that do? People tend to dump good ideas to chase maybe far too much. You've done alot so far that is very good, what can they add to the mix? Is their whole concept based on you dumping everything else? Does it have to be everything? Can't it be 25% or 50% of assets or is it all or nothing? </p>

<p>If you do what they are suggesting ask how much commission they make. Roughly I see around 100k in commiss. on this one. I wouldn't pull the trigger on this one. I live on commission, but I also live with the SEC. Best rule of thumb I offer is never sell something you'll have to pay back in court later. This philosophy hasn't made me rich, but I haven't been to court either. </p>

<p>good luck and triple check this one.</p>

15

<p>As a brand new user and first-time "poster", I am overwhelmed by the responses and how unanimous they were. Not one "yes" vote to the proposed financial strategy focused on a Universal Life policy..</p>

<p>Rather than jump ship, I am inclined to stay the course. Thanks for the insight.</p>