What a CPA is told to tell clients for financial Aid

Paying for College
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<p>Blacktie, you are absolutely right. Income is the biggest factor in getting financial aid. Big income, no assets, means no awards. You should have been saving. That is something that makes some sense. One issue that can be a problem with that facet is that there are some who have only been making that amount recently, and there are those who have been at that level for more. Past income does not play a heavy role in FA, not at all for the FAFSA.</p>

<p>Where asset reallocation makes the most difference is where people are close to the threshhold of qualifying for aid. If your income is below X and assets belowy Y, you are eligible. That Y represents sacrifice and savings for some families. At that income level, even if it is a windfall inheritance or family donation, these are families that are not usually living in luxury, but in middle class/working class situations. </p>

<p>There are exception, of course. Unfortunatel as in any system, there are those who outright lie and cheat for an advantage. To me there is a big difference between such people and those who do a responsible financial audit of themselves before entering the college app scene, and reallocate assets so that they are in better shape to get more aid.</p>

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<p>I have not read the posts in between, so forgive me if this is redundent…cash value in life insurance is not an asset in FAFSA, BUT if they put that money in now, thinking to take it out for loans, you have to be aware there will be surrender charges for the first 10-15-20 years of the policy based on the original target premium. They could think they were going to use those funds to pay off loans at the end of school and not have the monies available until the kid is 30 or 40!</p>

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<p>Also, if all home equity is protected, whether that be a $100k home or a $1 million dollar home, then the person still has to afford that home- taxes, insurance, furnishings, utilities, etc. The chances of some big shot having a brand new mega expensive home and affording all that and still having income low enough to obtain financial aid is slim. I would imagine most $1 million dollar homes where the person has low enough income for financial aid would be some one in California who has lived in the house for 20+ years, has prop 13 prop tax protection, and bought the house for $100k and could not afford the home at it’s new price.</p>

<p>Most of financial aid is based on income, if your income is above a certain level, there is simply less help there even if you hide all your assets- of course, the HYPS type schools with new formulas are in their own category; I am really addressing FAFSA schools.</p>

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<p>

Not redundant at all - I was wondering what the long term impact of using the money this way would be to the accessibility of the money (sorry that is an awful sentence -hopefully you understand what I am saying - I don’t seem to have the brain power to rewrite it right now). My gut reaction to this sort of insurance is always a negative one. I like my money accessible.</p>

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<p>somemom, </p>

<p>I was thinking something along the same line. Most life insurance products like those described are not very liquid. </p>

<p>So if the parents in question lock up $100K for a couple of decades, they have perhaps reduced the EFC $5600 per year (assume the parental or 529 tax rate). In return they get perhaps (if the school isn’t gapping that extra $5600 because you hit max aid) a generous 50-50 mix of grant and loan (assuming work-study is already maxed). So, you get an extra $2800 in grant, but also have to take out an additional $2800 in student loans per year (because your liquid cash is tied up). And since you’ve probably already gotten the max subsidized loans (before the additional $5600 from the insurance bump), these loans are racking up interest. </p>

<p>Now look at the yield on the life insurance product. I have yet to see an insurance product that pays a yield anywhere near what a similiar investment in a low-cost mutual fund of similar risk profile. Primarily this is because, the insurance company needs to make its markup to cover its overhead (sales commission, regulatory tracking, etc).</p>

<p>I’d be curious to see someone do the math comparing leaving the money in a 529 in a conservative (mostly bond) mutual fund (typically used for retirees who cannot afford significant capital loss in a short term) vs. the best insurance product they can find. Even with the FA “tax”, I think any advantage in gaining additional FA from a school is probably washed out by the combination of poorer yield and the loan interest for the student loans required to carry out this strategy.</p>

<p>FWIW, I have always been a person who does not believe in carrying any non-term life insurance. And that should only be carried until your savings can handle the loss (to your family) of your life.</p>

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<p>I think the money was in the students names in UGMA which would be 20% to the EFC for FAFSA. But i would still not choose the lie insurance path.</p>

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<p>Does anyone know if the single premium life insurance loophole (where there are no taxes on the other end) and where you can borrow back from the policy at very low interest has been closed? I read a NYT article about it and realized it was a very old article. I think the previous poster’s calculations about the actual FA benefits being minimal per 100,000 sheltered are probably accurate.
Does anyone know if the primary residence (only residence ) for Profile has to be lived in? I live outside the country and rent.
Thanks in advance</p>

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<p>The tax act of 1987 closed many loopholes that made SPID policies incredibly attractive in the mid-1980s. We have clients who are now retired who use a portion of those cash values as income supplements- it is no longer atractive in the estate planning venue the way it was then, but if you had an extra million or two lying around back then it has performed very well, in fact. :D</p>

<p>If the people funded a plan with $100k cash input, they would have access to borrow back the funds above the surrender value, and the surrender value would be based on the policy target premium. Assuming they bought the lowest possible face amount policy, they would still have access to a large chunk of the funds- it gets technical with tax laws, tax free death benes, etc, so would have to be run carefully and I did not know there even were SPID plans that are attractive any more.</p>

<p>Just playing around, without thinking too hard, I come up with a $2 million dollar policy and $50k surrender charge; and you’d have to justify why that 18 year old would financially merit a $2 million policy and it violates several policy rules that affect tax provisions. So, they must be using some specialised product structured around this type of need. I can see it working for some estate tax reasons for some wealthy trust fund baby, but not an average middle class kid.</p>

<p>As to the life insurance rate of return, all I can say is that it is probably better than all my stupid mutual funds that are still below the 2000-2002 values :eek: But mainly, it is a good product for SOME people’s needs and not so great for others.</p>

<p>I have to admit, working in the industry, I got my kids a policy as kids, and rewrite it at age 18 when they can qualify for the more competitive preferred classes available to adults. I see way too many people who cannot qualify for coverage at all and it is very cheap at 18-20, so it protects them for the future and costs almost nothing.</p>

<p>If you bought your baby a $100k plan as a toddler, you might pay $300-$600 for the insurance, and you would be limited as to how much money you could put in. Those old plans in the 1980s would let you put in $100k cash and have $100k death benefit. Now they would need to follow regulation formulas. I just don’t see it being wise financial planning only for FAFSA- better to pay off the mortgage and use an HELOC</p>

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<p>Owlice,
Yeah, we’ll be hitting the HELOC, for as long as the bank permits. We have a good bit of equity even after the downturn – mainly because we haven’t touched it except as short-term funding (i.e., 2-3 months) in the ten years we’ve had it. We also refinanced to a 15-year fixed about six years ago to build more equity.</p>

<p>We are trying to pare as much as we can from current expenses. DH is also putting major pressure on me to get a job…will love to see how that works. I proctored AP exams for three days this week and spent all of today sleeping to recuperate from that. </p>

<p>Good thing I have a nice term life policy – increased it when I was pregnant with #2 and included an automatic increase rider.</p>

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<p>Some may think that I am really upset about the UGMA and S paying taxes. Posts #13 and #18. Actually I am not. There were and are still many advantages that make me think that even if I had to do it all over again, but within today’s the environment of 529s, education EE Bonds, and changes in the minors tax at parent’s rate, prepaid tuition calls, I would still do what we did. I looked at many “baskets” to keep the eggs but each had their disadvantages. The best I could determine was to keep something in each basket but keep the biggest portion in the basket that we had the most control.</p>

<p>When you start investing at birth, we are pretty much guessing on the possible outcomes 17 years later. We were pretty much guessing two years ago when S graduated college, 2 years ago, and today guessing on what will happen after his tour of airports, with a technical master’s degree.</p>

<p>What the CPA said, is true for maximizing FA. For us, I didn’t want to take the chance in NOT getting FA. This attitude is the far side of the possibilities. The opposite far side to get 100% FA, which is doable, rare, and altogether unattractive family lifestyle. </p>

<p>disclaimer: DS did get a small amount merit aid as undergrad and very good merit aid as a grad student.</p>

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<p>The problem with all this manipulation is that (a) there is no guarantee that any college will make up the difference in grant aid, and (b) it isn’t looking at the more important issue of long-term financial health of the parents. </p>

<p>So, for example, if a parent shifts assets in a bank account into a Roth IRA each year… that makes a lot of sense. It protects the money from consideration, but it still preserves the money in a way that is relatively liquid for the parent in case of emergency – especially for an older parent. And the parent clearly benefits from increased savings for retirement – no down side to that one.</p>

<p>However, if money is spent down in other ways - let’s say you take $100K and pay down your mortgage early at a time when the housing market is in decline --so you have paid out cash but your equity is declining due to market conditions – is that really helpful. Maybe the college increases grant aid by $5600 each year, a net “savings” of $22,400… but let’s say that home value declines by $75K during that time due to market conditions. So the parents are really worse off at the end of 4 years. </p>

<p>And as noted… there is no guarantee that the financial aid comes in the form of grants. Loans are always more expensive than paying cash outright --so the parent who socks away $100K and simply finds that the college awards their kid a bigger work study contract and more loans has not made a wise decision. </p>

<p>I do think it makes sense to consider financial aid eligibility as one factor when making decisions along the way. I just think it’s nuts to use that as the determining factor to making expenditures or shifting funds in ways that are not otherwise beneficial over the long term.</p>

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<p>There are insurance products where you have access to the cash within a few years. This is particularly true of single premium life insurance. </p>

<p>Also, asset allocation only works if you don’t have too much income,which could cause loss of aid anyway. However, even with that, there are asset allocation strategies.For example, since 20% of the kid’s assets are deemed available, yete 5.64% of the parents assets are deemed available, using up the kids assets can help. Puting assets into tax exempt bonds or Series E government bonds can also help reduce income as well. If you are self employed, there is a LOT of tax planning that a self employeed person can do. I wrote a whole book on that. </p>

<p>In short, to maximize financial aid, both income tax planning and asset allocation planning becomes necessary. In some cases, folks make too much income and little can be done to reduce that. My analogy with the teachers worked because they didn’t make too much money.</p>

<p>As far as putting money in a home and seeing its value drop, that is a definite possibliity. However, I will tell you what one of the top real estate investors/developers in the country told me, " Even a bad real estate deal, if held long enough, becomes a good one over time."</p>

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<p>As to paying off the house mortgage with the money…</p>

<p>For those of us who don’t itemize (low property tax and mortgage interest), that 5.5 - 6% tax free return on that money doesn’t look too bad these days. Especially income that doesn’t affect FAFSA.</p>

<p>And whether you are paying off a mortgage on a house that has appreciated or depreciated, you still owe the same amount of money unless you are one of those who intends upon walking away from your subprime loan on the house you are upside down in.</p>

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<p>The problem of overmanipulation for financial aid purposes may not be the best strategy over all for you. In the end all of the manipulation in the world could end up for naught even if you get things down to the minimum if the college does not give much aid. THere is not all that much free money out there. Pell, some seogh, some state funds. Maybe some funds earmarked for those who qualify for need based aid. But not much is certain. I would make sure that it is worth it to make these manipulations. It can be a really stupid idea to buy those insurance policies if the only reason what to shelter the money for fin aid. As far as real estate goes, a bad real estate deal can cost an awful lot of money before it is considered good, and it can be an awful lot of time living with the stinker. You do have to consider quality of life during that time along with taking the time value of money expended during the time that it is costing. My MIL chortles over the lot she bought years ago for much less than it’s worth. Well, she has had to pay taxes on it, have it maintained. Yeah, she’s made, but no where what she thinks. A house can be an even bigger headache and expense if it is not what you want. And if you need to unload quickly you can lose very easily especially in a climate like today’s.</p>

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<p>I agree with you all about the possible futility of shunting assets legally --just to keep (up) down with the Joneses-- however I keep thinking I may be missing something everyone else out there knows about (the middle-incomers getting aid). In other words, it doesn’t hurt to research legal methods of lowering EFC for the Profile. </p>

<p>Tax Guy:
Self-employed as a freelancer. What do you suggest? Thus far, I only claim income on my SS on joint tax return. How many assets can be invested in my “business” and what are the tax implications. Thanks for the help.</p>

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<p>Marie3,if you will PM me, I will send you some suggestion reading.</p>

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<p>I look at any shuffling around of assets more as a hedge against bad fortune. Given current household income, it’s a useless exercise. If one of us should lose a job, though, then the shuffle might make a difference. </p>

<p>I’m also thinking about the short period when we’d be paying for two college students, or the possibility of paying for one college student and one professional school student. During those years, our EFC would be less than total COA for two students, so driving the EFC down might result in actual FA. Or not; that’s many years in the future, and my crystal ball is looking awfully hazy.</p>

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<p>When you think about it, the EFC calculation makes little sense. If I am siting on $400,000 of home equity but have an outstanding loan balance of say $300,000 and have as much as $200,000 saved in investment, I probably won’t qualify for much aid. Same scenario except I prepay my loan with the $200,000 of savings, assuming that I don’t make too much money< I qualify for need based aid. It is very stupid.</p>

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<p>When you think of it…</p>

<p>It is hard to find any government policy that makes sense…</p>

<p>IIRC someone mentioned earlier the tax deductability of home mortgage interest “encouraging home ownership”. Until you find out that as you pay off the mortgage, your taxes go up and up. So you refi and take out more money to get that tax bill down. My California siblings seem to live by that rule. </p>

<p>No, it seems the mortgage deductability only encourages “home indebtedness”.</p>

<p>So it doesn’t surprise me that FA policy encourages people to become illiquid in their assets.</p>

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<p>I don’t think so, goaliedad. The home’s assessed value remains the same, regardless of how much or how little you owe on it. The only thing that makes tax bills go down (I’m talking about real estate taxes here) is if the value of the house goes down, which has of course happened to many people recently.</p>

<p>Paying more and more interest on a larger and larger loan seems a dubious way to increase deductions and therefore reduce income taxes. Someone’s not looking at the net expense there.</p>