<p>vballmom, goaliedad is talking about the mortgage interest writeoff. As time goes by, your mortgage payments swing more towards paying the principal than paying the interest, so there’s less interest to deduct. Hence, the federal tax bill goes up. </p>
<p>I don’t see how refinancing to save on the tax bill saves money overall, though. Now you’ve got a larger loan payment to make every month. Wouldn’t that swamp any tax increase?</p>
<p>This following excerpt from financial aid CC thread is the reason it behooves everyone to juggle assets, especially into home equity because much is disregarded (alas, I have no house) when it comes to certain generous schools. If that person had assets in CDs instead of a house they would not receive anything. (Just like taxguy said–it does seem so unfair)
Taxguy–I am trying to figure out how to PM you. </p>
<p>"First, did you figure your assets the way Stanford figures them? Following is a quote from the Stanford FA website about typical assets.</p>
<p>"For applicants who report total annual parent income up to $100,000, we generally consider “typical assets” to be an adjusted total net worth of less than $250,000. Adjusted total net worth usually reflects the sum of the following amounts:
<p>Our asset total is about 10% higher than that and we got the equivalent of about 3/4 tuition in aid. There are other factors as well, such as, how much money is in your child’s name, where you live and if you have any other kids in college. We have no other child in college."</p>
<p>SlitheyTove, my point exactly ;)</p>
<p>Higher interest payments translate to a higher mortgage interest deduction, but the marginal reduction in taxes can very easily be less than the marginal increase in interest payments. Example: refinance to take out $100K in equity in your home, interest payments increase by (say) $8000/year, reduce your adjusted gross by this extra $8000, do you get a reduction in your taxes of $8000? Nope, more like $2000 on an income of $120K. Net loss: $6000. Good idea? I don’t think so…</p>
<p>Actually, in the case of my California relatives, they are in the top federal and state marginal tax brackets (38% and 10?%) so for that $8K in additional mortgage interest (to buy a new car, lets say), they get almost $4K back from the government. If they refi at 6%, they in effect borrow for 3% - much cheaper than auto financing.</p>
<p>So all of the debt ends up being home mortgage.</p>
<p>Not my style, though. I don’t pay enough interest and property tax to itemize and my marginal tax bracket is 25%, so the economics are much different. For each their own.</p>
<p>marie3: I think that was my post on another thread. The rules for FA eligibility at most schools don’t resemble those for students from the top schools with the new enhanced packages. There is, of course, no way you can know ahead of time if your child will get into one of these schools. We did everything for our kids the old-fashioned UGMA way, meaning that the money is solidly in their names, before 529’s existed. Turned out great for our son, because another perk of his school’s FA is that they only count 5% of money in his name per year. </p>
<p>Most of that money will be spent, however, because it was put aside for him as a college savings fund. The great Stanford FA means that he will have some left either for grad school or to set himself up after undergrad.</p>
<p>But this is NOT the case for most families with kids in college.</p>
<p>Pretty amazing that Stanford would cap home equity at 1.2 X income, given that the median home price in Palo Alto is $1.2 to $1.4 million, depending on whose data you use. I’m guessing most other PROFILE schools aren’t as generous with their definition of home equity.</p>
<p>goaliedad - interesting calculations, and clearly another reason to look at the net gain/loss when deciding whether or not to make this kind of financial transaction.</p>
<p>Harvard doesn’t include home equity at all.</p>
<p>Princeton has long disregarded equity in one’s primary residence.</p>
<p>
A married couple around age 50 will have an asset protection allowance around $50K. That means the $200K in assets results in an EFC increase of 5.6% x $150K, or $8400. If you can invest that $200K in bond funds with an average yield of 5%, you are earning $10K annually on that money, which itself results in an EFC increase of about $4400. So basically, if you keep $200K invested, your net “loss” is $2800. </p>
<p>So … you put it in the house. As I posited above, the housing market is now in decline. (That’s the current reality). If you had $400K in equity with a $300K outstanding loan, that assumes a market value of $700K. Lets say you put the full $200K into the house. Now you have $600K in equity. Except… let’s say that in 4 years time the house declines in value by $150K. So you’ve gained $11,2000 in savings based on net after accounting for reduced interest income as well as reduced EFC… and presumably you’ve paid down the remaining mortgage as well – let’s say you now only owe $50K; you are living in home now worth $550K – so you’ve got $500K in equity, but no savings. So basically you’ve lost half of that $200K you put into the house, all in order to get an EFC reduction of $8400 per year.</p>
<p>And it gets worse: NO FAFSA-only school guarantees to meet full need. So all this sheltering could simply result in a bigger “gap” number in your aid package. Also, most colleges expect students to take on an increasing loan burden each year - that’s built into the Stafford system. If your income was high enough that the EFC hit from the $200K investments was the difference between qualifying for aid or not, then you probably are losing a slice of grant money to increased loans each year. Meanwhile, the schools that claim to meet full need use CSS Profile or their own calculation, and most are considering home equity – so your “shelter” isn’t all that helpful. </p>
<p>Your problem is that you assume the FAFSA system of EFC calculation to be an entitlement – it isn’t. The only place where it is a guarantee of more money is with Pell grants, and if the income is low enough for the family to qualify for Pell grants, then they are unlikely to have much assets around that need sheltering. (Even if they had such assets -perhaps from an inheritance or other windfall, such as settlement of a lawsuit – they probably need to use those assets to supplement their basic living expenses). </p>
<p>For everyone else, all you have done is established greater eligibility for aid dollars, not reaped more cash. </p>
<p>You’ve got to look at the big picture. As I said above it makes sense to plan and shelter assets in a way that is consistent with overall long-term financial planning, such as to maximize retirement contributions. But too much of the “advice” given is in the nature of cutting off your nose to spite your face.</p>
<p>How about this: take all the excess money, change it into travelers checks and place them under the mattress. Separate the pieces with the numbers on them. That’s how the senior citizens do it when they are trying to get aid from the government. If you need to use the money, cash in the checks. You’re not getting much interest on the money anyway.</p>
<p>But putting money in your mattress means you still claim it on FAFSA, legally. It’s one thing to understand the rules (tax or Fafsa) and shelter assets (for example by using cash to pay down consumer debt) it is a whole different ball game to lie on a federal form!</p>
<p>calmom notes,“So … you put it in the house. As I posited above, the housing market is now in decline. (That’s the current reality:”</p>
<p>Response: Actually, it isn’t a reality everywhere. I live in Marland by Wash DC. Our housing in our area has not declined. </p>
<p>As for paying off debt when a house declines in value, I can’t speak for California banks, but on the east coast, if we owe money on a loan and don’t pay it off, banks are very aggressive about going after us even if the underlying collateral declines in value. Thus, paying off debt does increase one’s net worth.</p>
<p>There is an old accounting formula that all of accounting is based on:</p>
<p>Assets- liabilities = net worth</p>
<p>Fewer liabilities means increased networth. You can’t do much about the value of real estate assets,but you can pay down debts that you are personally liable for anyway.</p>
<p>Yes, but a house is not liquid and when you pay down a house you limit your options in terms of other uses for the funds. It makes sense to get rid of consumer debt, but mortgage debt is something that will be paid off or transferred with the sale of the house, so it really doesn’t fit into the “net worth” equation in the same way. </p>
<p>It seems to me like a lot of the advice I see about maximizing financial aid eligibility is penny wise and pound foolish. Let’s assume that the parents make the choice of prepaying their mortgage by $200K in order to shelter the money from financial aid. That leaves them with an EFC based on their income alone of, say, $15K. Then their kid gets into his dream school… NYU. Unfortunately, NYU doesn’t promise to meet full need, so the financial aid package looks something like this:</p>
<p>COA - $50,000
NYU Grant: $10,000
Stafford Loan: $3,500
Work Study: $4,000
Gap/ Parent PLUS Loan: $32,500</p>
<p>So where does this family come up with the extra $30K for the first year of college? They can pull it back out of the house with a HELOC – but they’ll pay a loan origination fee, an appraisal fee, etc. – and they will be paying interest on what they borrow. </p>
<p>Unless you can find a school that will guarantee to meet FAFSA EFC and also be assured that the kid will get accepted to that school and want to attend, the whole thing is an exercise in moving money around based on contingencies that may never happen.</p>
<p>I apologize if you all might have discussed here or somewhere. How does home equity count towards the EFC in Proflie? My parent is thinking of selling the home and rent a place. How does it impact the EFC? Obviously, once the house is sold, we got more cash in bank.</p>
<p>Profile excludes 50k in home equity. Everything above that counts as available assets. At least that’s what it said on the calculators I used.</p>
<p>Calmom notes,“Yes, but a house is not liquid and when you pay down a house you limit your options in terms of other uses for the funds.”</p>
<p>Response: Did you ever hear of refinancing? Yes, real estate isn’t a liquid as stocks. However, you can refinance a principal residence, even in todays environment, and get money out. </p>
<p>As for liquiidity of real estate, every thing is sellable at the right price. In our area, the house next door was on the market for two weeks before an accepable contract came in.</p>
<p>How bout this…If you have 200k in funding that can be reallocating into anything…use that 200k to pay for the child’s education and leave the need-based aid for those who truly NEED the extra funding. While Pell Grant funds aren’t limited, other need based funding is limited. When someone who had 200k in assets “hides” it, legally or illegally, you are, in essence trying to steal need-based funding you otherwise wouldn’t qualify for.</p>
<p>It really angers me when I see a family coming to the FA office begging for aid…when the father drives up in a brand new sports car, mom in a brand new gas-guzzling SUV and the kid in a fancy sports car, especially when they have “hidden” assets to make themselves “needy”. We then given them the need-based funding they “deserve” and send them on their way. Weeks later a single mother with her child ride the bus to the institution…after having travelled to our town on Greyhound…asking for additional need based aid. However, we can’t offer them anything additional because we just gave it to family 1.</p>
<p>Think that doesn’t happen? Think again…it is an almost weekly occurance in many financial aid offices across the country. Heck, I am in school…make less than 30k per year for a 4 person household…have NO assets other than my 1994 minivan (currently assessed at $900.00)…have an EFC of less than 200…and I can’t get SEOG this year because all the funding is gone. But the person who spoke to the counselor just before I did drove up to the school in a shiny Beamer and was awarded SEOG.</p>
<p>NikkiiL,</p>
<p>I take it that where you referring to (UVA?) awards SEOG on a first-come, first-serve basis (based upon eligibility) as opposed to waiting until a certain date and awarding SEOG matched to lowest EFC getting first priority in award funding (thus minimizing the BMW driver’s potential and maximizing the bus rider’s potential assuming the bus rider has a lower EFC).</p>
<p>I don’t know whether an institution has the ability to engage in this type of award practice or not, but it would make sense to me.</p>
<p>And I do sympathize with the plight of those less able to afford college (especially those of us lesser paid people in the public sector), it seems to make little sense for a parent of modest means (not necessarily poor) to pay more than they can legally for college because the administration of FA is poorly structured. </p>
<p>Personally, I am inclined to ensure that our assets are deployed in a manner that best protects our interests of a secure retirement income (first priority), a secure home (second priority), and then financing our children’s education (third priority). </p>
<p>I have been riding to work (at a public institution of higher learning) on a public bus every day for the past 5 years (instead of taking our minivan with 130K miles) primarily so I will have that extra 5 or 6 dollars a day to help fund those financial goals. I notice that there are a couple hundred local students who could very well be riding the same bus as I do to the same campus, but instead are driving a nice SUV (compliments of mommy and daddy) while having the bulk of their tuition paid for by a state lottery scholarship. </p>
<p>This is America and that is their choice. And while the tuition and FA policies of this state allow for it, I cannot argue with their choice. However, if my D wants to go to an out of state school to pursue her goals, why should I be required to give up a significant part of my savings (from riding the bus) because I allocate those funds to secure my retirement and my home first? Quite frankly, if more people behaved in this manner (saving for retirement and paying off their homes), the upcoming Social Security crisis and home price plummets would not be threatening the very underpinnings of the country.</p>
<p>I have a couple of questions as a student. </p>
<p>First – The maximum amount of money you can make is 5100 without declaring taxes right?</p>
<p>Second – Is work study money included in that? Why do I keep hearing that work-study is not taxable income? Am I allowed to make as much as I can and not declare taxes if it isn’t taxable income? Or do I have to declare after 5100?</p>
<p>Work Study is taxable income. It does not affect your EFC because, although it is included in your AGI on FAFSA, the EFC formula deducts it from income before calculating the EFC. But for federal and State taxes yes it is taxable (though not for medicare and fico).</p>
<p>The limit before you had to file a tax return for 2007 was @ $5300 for earned income. It is lower for unearned income (@ $800 I think). If there is earned and unearned it is different again. </p>
<p>Don’t forget that the taxable part of scholarships/grants also contribute to income that must be taxed.</p>