What a CPA is told to tell clients for financial Aid

Paying for College
101

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There is some truth at old saying “it is human natural that spend the ‘free’ money ‘freely’…”</p>

<p>I posted this in another thread. There was an old thread, where a full pay student talked how he had to shop around for books and stuffs, yet students on ‘need-based’ FA buy brand new book, upgrade computer hardwared ‘freely’. And not long ago I saw a similar disscussion in MIT’s forume/blogs. … </p>

<p><a href=“http://talk.collegeconfidential.com/california-institute-technology/26566-tuition-increase.html[/url]”>http://talk.collegeconfidential.com/california-institute-technology/26566-tuition-increase.html&lt;/a&gt;&lt;/p&gt;

102

<p>Yes you can:
“You should try to be strategic when saving for college. One thing to avoid is overfunding your 529 plan, says Rick Darvis, a CPA and certified college-planning specialist with College Funding in Montana. Sure, excess funds can be transferred among family members, including cousins and grandkids. They also can be used for graduate-school expenses. But withdrawals used for nonqualified expenses are taxed as ordinary income and hit with a 10% penalty. (The taxes and penalty are applied to the earnings, not the original contributions.) So the ideal situation for most is to have no money left over once the kids graduate.”</p>

103

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But it was after tax money (at least paid for federal income tax, havn’t look if tax deductable in my state yet). Were the taxes and 10% penalty applied to the ‘interest’ only or the ‘whole’? If it applied to ‘gain’ only, then is it better strategy just leave money there (if there is still some after the kid graduate), withdraw after you retirement? Since by then your tax braket is lower than now.</p>

104

<p>Goaliedad, just because you can negotiate something doesn’t mean the results would be the same for someone else who is negotiating in a different context. (Remember, I’m an ex lawyer, - I actually used to do some real estate transactional work, but what I could do for one client I could not necessarily do for the next.). Things are different if interest rates are rising, housing values declining, and the borrower has some issues with income-to-debt ratio – or whatever else gets in the way of negotiating. You are right that it is seldom beneficial to pay points unless the person plans to remain in the same house for awhile – the same rationale applies to taxguy’s scenario, though – there is not much sense in “sheltering” $200K in a house that the family doesn’t plan to keep for the long haul… especially in a declining market. And to taxguy: if you have the good fortune to live in one of the few areas in this country where real estate values are strong and stable – good for you – but don’t give advice to others premised upon that. The national trend right now is that the stock market is going down, the real estate market is going down, and the US dollar is going down. You may give great tax advice, but financial-planning advice needs to take into account these trends, as well as individual circumstances.</p>

105

<p>Calmom, actually, I wasn’t giving any specific financial planning advice. If you reread post number one, I noted that the information given was present in a continung education course. I did NOT come up with these ideas and certainly everything said must be corellated with a person’s financial situation.</p>

106

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calmom,
If you are talking putting $200K of improvements into a house, I can agree with you about throwing good money after bad. If you are talking paying $200K on the mortgage you owe, that is a different thing. That $200K has to be paid at some point unless the owner is so upside down in the house that s/he chooses to walk away. And then the lender can pursue the borrower for the difference.</p>

<p>Now if that $200K is all the liquid money this family has, they are probably doing themselves a disservice dumping it all into paying the mortgage down. There is an small protection allowance (depending upon age of the oldest parent) that should be kept on hand. Often this is as much as a couple of years of the family’s EFC.</p>

<p>As to negotiating converting fees into an interest rate adjustment on a mortgage, a good mortgage broker - not an originating institution like a bank - should be happy to do that for you to get your business. I’ve done it in rising and falling rate periods. It is a simple present value calculation to figure out the correct interest rate adjustment to cover the costs of the closing. I’ll admit, I’ve talked to a few places whose front people don’t know how to use a calculaor to do the math, but if you ring enough phones, you can find a good broker in any city.</p>

107

<p>And the housing market in general, even in the Maryland suburbs of DC, is declining. Sorry, taxguy, but your one street or small neighborhood may not have been hit, but that is definitely the exception. Ask around.</p>

<p>I’m hoping that the market in this area has a good reason for an uptick after November. :D</p>

108

<p>100.
Graduate school is a long way off for a freshman in college. Only sightly more for a freshman in HS. For our S, graduate school happened the moment he received the grad school’s acceptance along with the letter of scholarship, fellowship, & TA. Without the school’s financial awards, he would be in the workforce. </p>

<p>The problem with 529’s and like programs, is that it is a “use it or be taxed”. This is different from other tax programs such as an IRA, in that a 529 essentially is time and use limited. Unless held to the next generation (20 years plus) the owner of a 529 may possibly pay taxes and penalty. In contrast to an IRA, The IRA is more open-end; If you die before using all of the IRA money, the generation after you will have the problem of spending the money, which is not a bad thing.</p>

109

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No, because the homeowner may sell before the mortgage is paid down that far - so you are paying $200K up front that would otherwise be paid over many years. The lender is going to get whatever is owed at the point of sale. We’re not talking about market value of the house declining below the $200K point – the example posed was a $700K value house with $300K outstanding mortgage. It’s possible that the family lives in the house 10 years, pays mortgage down to $200K, house value decline to $600K – on sale they realize $400K. They’ve got plenty of equity – all they are doing by paying early is undercutting their ability to pay for various contingencies, including college. No one said that the family couldn’t handle the monthly mortgage payment in any case. </p>

<p>Keep in mind that they are also increasing their tax burden when they do this – the extra payment to principal reduces the amount of interest they are paying, which in turn reduces the mortgage interest deduction – so that translates into higher taxes for them – which also undercuts the anticipated net gain from a reduced EFC. Less money to the college, more gets paid to IRS. </p>

<p>And converting points into an interest rate increase is NOT a good idea if the family is likely to be in the house longer than whatever the break point is. You are right, anyone with a calculator can figure it out – which is why I wasn’t interested in doing that. My point is that any way it goes, it costs $$ to refinance – since most lenders will wrap the points into the loan, and either way you end up with a slightly higher monthly payment, it’s probably a net wash in any case.</p>

<p>The point I was making is that the family who “hides” their money in their house is going to run into difficulty if they decide they need that money later on – no matter how you cut it, it will cost them something to pull it back out of the house; and it is speculative at best to assume that it will result in additional grant money to their kid. The likely outcome is that the family will find themselves borrowing to meet a gap in financial aid, or the EFC calculated from their income alone, and they will be paying interest on dollars they could have paid out in cash without the games.</p>

110

<p>“It is important to spend the parents� investments for college expenses before borrowing money. If the parents� assets are used to pay college costs in the early college years, it could lead to a greater availability of financial aid in the later college years.”</p>

<p>OKay so I am currently struggling with this one. Daughter will be going to state school in the fall that is not generous with financial aid. I am a single parent and we are not wealthy, and also have child #2 to think about. D has been offered small music school scholarship plus an unsubsidized Stafford loan (which accrues interest from day one although does not have to be paid back until after graduation). There are published limits on the student loan amounts that may be offered each year. D has more than enough funds in savings from grandparents to pay for the first year and most of the second. So do we borrow the first year or not? Can we really bank on more financial aid later?</p>

111

<p>Calmom,</p>

<p>Yes, the lower interest paid on the mortgage would increase the family’s AGI, their income tax and the FA tax on their income. </p>

<p>However, you did not factor in that unless that $200K is stuffed in a matress, it will be earning interest/dividends that wiill also increase the family’s AGI and their income tax and the FA tax on their income.</p>

<p>It is a wash between the increase of the AGI caused by smaller deduction vs. increas of AGi caused by additional interest on $200K in the bank.</p>

<p>And you still pay the FA asset tax on that $200K invested every year in terms of a higher EFC of about $11,200, while that same money paid on the mortgage is ignored in FAFSA FA calculation.</p>

<p>And for someone who can afford a $300K mortgage ($100K annual income) and has has that extra $200K in the bank, their EFC is probably close to the COA, so at that margin, paying down that principal and decreasing the EFC $11,200 may very well yield significant grant aid where without it, they would certainly get only loans (the first level of aid generally awarded by schools to those at the fringe).</p>

<p>Once again, I do not advocate dumping a family’s asset protection allowance (often equal to a couple of year’s EFC) and would suggest having a HELOC available to backstop the family’s liquid assets as they deplete them to cover the EFC over the first couple of years of college. When you get close to the end of college and know how much will be needed to complete the education, you can then decide whether to re-fi the house (if interest rates are favorable or you need the cash flow) or to keep any HELOC borrowed money as a 2nd mortgage.</p>

<p>Once again I stand by the argument that moving those unprotected assets to a protected class will yield a better EFC and for many folks, additional grant money.</p>

112

<p>Goaliedad, read my prior posts, I did factor in the impact of the interest on savings on the EFC in my post #69: <a href=“http://talk.collegeconfidential.com/1060359377-post69.html[/url]”>http://talk.collegeconfidential.com/1060359377-post69.html&lt;/a&gt;&lt;/p&gt;

<p>In the long term, it is always better to maximize earning potential. No matter how much the taxes and the EFC go up, there will always be net gain.</p>

<p>If you offered me $100,000 tomorrow, I’d gladly take it, bank it, and tell Barnard College all about it. I would be delighted to pay $5600 over and above what I am already paying for the next two years… heck, if my d. gets into the graduate program she wants, I’d pay for that as well (that’s one more year at ~$50K)… 3 years down the line I’d still be $40,000 richer than I am now.</p>

113

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You really don’t get it, do you? EFC is NOT a guarantee of grant aid-- it is a standard by which eligibility for federal benefits is determined. What is going to happen with most of those families is that they are going to see bigger GAPS in their aid packages. With the exception of a handful of elite colleges, every other financial aid awarding college is going to look at home equity as part of the calculation. </p>

<p>Sometimes I think that the people who so confidently talk about moving assets around have never actually seen a typical financial aid award package from a mid-range university. 90% of parents who play that game are just going to see a financial aid package with a bigger gap and more loans. </p>

<p>Anyone who has $200K lying around that they can afford to reallocate doesn’t need the $10K grant they are aiming for. They can just withdraw that amount from their interest-bearing accounts each year – and 4 years down the line they’ll have maybe $190K instead of $200K. Yes, they should pay off consumer debt; yes they should fund their retirement accounts – but I really get ticked off by rich people who whine about needing financial aid while they are trying to figure out where to hide their money. Need based aid is supposed to be for people who DO NOT HAVE extra money lying around.</p>

<p>If a family has too much money to qualify for financial aid and is worried about college costs, they should encourage their kids to look for colleges that will award them merit aid. My d. had merit offers of $8-$10K from respectable colleges – that is as much money as the family would get from shuffling assets around.</p>

114

<p>goaliedad,</p>

<p>I wasn’t referring to UVA, but a private LAC. Certain funding, such as SEOG and Perkins are only offered on a limited basis. It is first come first serve, to a point…when many applications are received virtually at the same time, it goes to the “most needy” of applicants first. This is what happened in my case.</p>

<p>Also, I am not referring to those people who are truly planning for their future and retirement. One must invest their funding wisely to ensure the ability to retire some day. And, as both a parent and a student, I understand, and agree with the concept of squirreling money away for one’s retirement and taking loans for the child’s education. I was only venting about those individuals who are placing their financial aid desires at the forefront…squirreling away funds solely to increase the likelihood of receiving a better FA package. Diverting funds with the sole purpose of improve an FA package, while the diversions might be totally legal, is the bigger problem, as I see it.</p>

115

<p>Owlice, I am fully aware of housing declines in this country and in the DC area. I am NOT arguing with you about it because what you say is generally true. All I am pointing out is that it isn’t true everywhere for every neighborhood. </p>

<p>The DC area seems to be VERY education conscious. If the schools are considered great, people will pay to live in that area. We are in the Wootton School district ,which is the only district in Maryland that has recently won national blue ribbons for both elementary, middle school and high school,which is one reason why our pricing decline hasn’t been as bas as other neighborhoods.</p>

<p>However, I really do believe that within a year or so, real estate will come back and start appreciating like it did. The federal governement will be both hiring and expanding as will lobby firms and consultants.</p>

116

<p>Housing prices should be a function of average income but exotic financing pushed up housing prices to ridiculous levels. In the crash of the late 80s and early 90s, I saw real estate drop by 50%. The worst areas are Florida and California.</p>

<p>If average incomes continue to decline, then I would expect the same thing to happen to housing prices. The Fed desperately needs a reflation - the problem is in getting incomes higher. Right now, inflationary attempts are flowing into commodities which is squeezing consumers. The wipeout in the 80s and 90s was severe in my area and it had the right results. Prices declined, people saved, and there was less speculation. It paved the way for the boom years in the mid to late 1990s.</p>

117

<p>I have a question: I have a second house and I rent it out. The rent is part of my income and I report it on schedule E every year. Is the equity from this second house considered investment asset or business asset on the financial aid calculator? Thanks.</p>

118

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</p>

<p>That is correct, but when we looked at the problem, we saw a multitude of potential problems that could affect the potential outcome negatively. Although I was not trying to hide the UGMA and avoid a high EFC (100%); The best solution that I could come up with was to manage our cash flow and minimize investment risk in the UGMA and other investments. </p>

<p>We looked at the EFC calculators (had to refresh the exercise again last night) and saw for our situation, that a + change in UGMA resulted in a 5:1 affect in the the EFC: A $1000 gain in UGMA = +$200 in the EFC. The opposite or a - change also yielded the same result: A $1000 loss in UGMA = -$200 in the EFC. I’d like to take the EFC gain all the time but would be devastated in the loss in the investments even though we would have a lower EFC.</p>

<p>Eventually we took massive PLUS loans and a relatively small 2nd mortgage. Both were essentially a way to offset the risk in the UGMA investments rather than try to manipulate the EFC. I would be very careful in looking for additional grants and scholarships by attempting to change EFC by asset reallocation. So,we did what, goaliedad #111, suggests by taking a home loan as a hedge, and understood that the costs was substantial but reasonable in knowing that we guaranteed cashflow.</p>

119

<p>longprime notes,"The problem with 529’s and like programs, is that it is a “use it or be taxed”. "</p>

<p>Response: Yes and no. If you use the funds for non-qualfied items then the income will be taxable. However, you can use this for any family member including grandchildren, brothers, sisters, probably nieces and nephews etc.</p>

<p>There also seems to be a lot of advice against asset allocation. First, I have net seen single premium life policies,whose cash value is exempt from EFC calcuation, suffer too much in surrender charges. Usually the commission is a one time 2% unless this has changed in recent years.</p>

<p>Secondly, what is wrong with paying down debts that you owe anyway? Yes, it does leave less liquid fund,but on a home that has equity, you should be able to refinance if you need the money,which will simply put you back where you were otherwise ( fi things don’t go as planned) less some minor closing costs.</p>

<p>Also, when refinancing, I almost never pay points especially if I might refinance again.</p>

<p>Finally, someone noted that some insurance products make you keep the cash in the product for 5-8 years in order to avoid all surrender charges. However, my response is , so what? IF, and this is the “IF,” I can get some need based, grant aid or very subsidized loans, this would greatly add to my return on investment on what I will be making on the insurance products. </p>

<p>However, I do think that there is more to the equation then just asset allocation. Checking with an expert/professional in this area before any of asset shifting is utilized is always a good idea.</p>

120

<p>^. We still maintain and S maintains, small 529s. Future grandchildren, child, in maybe 5 -15 years? The potential compounding for 20 -35 years is too good to pass up. We have high hopes that some young lady will take him off the shelf. </p>

<p>PS. He is in Europe now, touring, by himself.</p>