Author Topic: Unethical to game Expected Family Contribution for college grants?  (Read 8768 times)

bikebum

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Is it unethical to strategically reduce your income so your kid can report a low, or 0, expected family contribution (EFC) on the FAFSA? Anyone out there do this? Or maybe one of your "friends" does, haha.

The posts about student loan forgiveness made me wonder about this, even though I don't have kids.

Here's an article with a table that estimates EFC based on income from 2013:
http://www.forbes.com/sites/troyonink/2013/01/02/2013-simplified-guide-to-expected-family-contribution-efc-and-college-aid/

EFC is 0 if the family AGI is less than $30K.

MayDay

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #1 on: May 01, 2014, 06:52:22 PM »
But it says that the table doesn't account for savings and qualifies retirement accounts, whatever that means.

We have a brochure from Fidelity (who provides he 401k at H's work) that says the EFC is a percent of income (like the table you linked) plus 3-6% of parental non retirement assets per year plus 50% of student income over $3750 plus 20% of students assets per year.


bikebum

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #2 on: May 01, 2014, 07:09:27 PM »
Yeah, in some situations you could still game it though. Say the kid doesn't have any assets and most of the parents' assets are in retirement accounts. And I'm pretty sure the house the family lives in also does not count toward the EFC.

Even if you have assets that give your kid a larger EFC, tweaking your income could still reduce it compared to what it would be otherwise. You just probably couldn't get to 0.

stevesteve

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #3 on: May 01, 2014, 07:22:29 PM »
Yeah, in some situations you could still game it though. Say the kid doesn't have any assets and most of the parents' assets are in retirement accounts. And I'm pretty sure the house the family lives in also does not count toward the EFC.

Even if you have assets that give your kid a larger EFC, tweaking your income could still reduce it compared to what it would be otherwise. You just probably couldn't get to 0.

I think it would take more than just saving more fore retirement to make it unethical.  Maybe that's an added bonus of saving for retirement--cheaper college--but I think it's somewhat hard to call that gaming the system any more than something like a backdoor Roth.

warfreak2

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #4 on: May 02, 2014, 04:48:42 AM »
Putting your money into retirement accounts is hardly "gaming" the system - but it could be done by e.g. "gifting" another family member a large part of your assets with an understanding that they will "gift" them back to you once the student finishes their course - or deliberately living in different houses at the time of the assessments, so the student only "lives with" one parent and the family income is much lower.

teen persuasion

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #5 on: May 02, 2014, 07:48:19 AM »
Here is the real EFC formula: http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf

EFC is not really based on AGI, since the formula adds back in any 401k, etc.  The best way to game it is to get below the $50k income level to qualify for the no asset test, or below the $24k income level to qualify for the auto EFC=0, but there are other things needed to qualify:

Anyone included in the parents’ household size (as defined on the FAFSA) received
benefits during 2012 or 2013 from any of the designated means-tested federal benefit
programs: the Supplemental Security Income (SSI) Program, the Supplemental Nutrition
Assistance Program (SNAP), the Free and Reduced Price School Lunch Program,
the Temporary Assistance for Needy Families (TANF) Program, and the Special
Supplemental Nutrition Program for Women, Infants, and Children (WIC); OR
 the student’s parents:
• filed or were eligible to file a 2013 IRS Form 1040A or 1040EZ,
• filed a 2013 IRS Form 1040 but were not required to do so, or
• were not required to file any income tax return; OR
 the student’s parent is a dislocated worker.


That chart was relatively misleading, since it mentioned AGI, not gross income, and focused on number of children, not family size as the FAFSA does.  The FAFSA also penalizes single parents - their assets have a much lower protection threshold.

Carrie

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #6 on: May 02, 2014, 08:45:37 AM »
Or you could just disown your child, go to court and have them declared independent.  (Not the healthiest way to go, but that seemed to work well for one of my siblings.)

Cpa Cat

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #7 on: May 02, 2014, 09:13:28 AM »
So, I admit that I've worked in both the student loan industry and in the tax industry, so maybe I'm biased. But ethics doesn't really enter the picture when it comes to IRS and Dept of Education FAFSA rules - unless you're talking about blatantly lying and committing fraud.

"Gaming" your income is part of the... err... game the government plays with you. If the government doesn't like the loopholes, then the loopholes get closed.

But the truth is, in all likelihood, any way you can legally "game" your income is something that is intentionally built into the system to create incentives for certain kinds of income/saving/spending.

No one is really getting one over on the government. If the government doesn't like what you're doing, it takes you (or someone like you, but probably with a higher income) to court. If it doesn't like the precedent that gets set, it changes the law. More often than not, though, the government is silent on loopholes, which is viewed as a tacit approval.

Someone, somewhere has said, "Hey, I think people might manipulate their income so that there's no EFC." And the reply was, "If people are gaming their income to that extent, then there probably should be no EFC."

warfreak2

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #8 on: May 02, 2014, 01:11:06 PM »
But the truth is, in all likelihood, any way you can legally "game" your income is something that is intentionally built into the system to create incentives for certain kinds of income/saving/spending.
Not so. Translating intentions into tax codes is hard, and governments often have to change the rules to prevent consequences that they never intended to enable or incentivise. Complex laws have bugs, just like programming code.

Cpa Cat

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #9 on: May 02, 2014, 01:29:48 PM »
But the truth is, in all likelihood, any way you can legally "game" your income is something that is intentionally built into the system to create incentives for certain kinds of income/saving/spending.
Not so. Translating intentions into tax codes is hard, and governments often have to change the rules to prevent consequences that they never intended to enable or incentivise. Complex laws have bugs, just like programming code.

As I said in my post: Anything that the government wants to "debug," will be debugged. Anything that does not get debugged is being intentionally ignored. The debugging process of the tax code is a constant, never ending stream of legislation and tax court decisions. There is very little that the average person can do to game the system that hasn't already been thoroughly reviewed, or intentionally ignored by the system.

I would advise against using any "new" ways to game AGI (Ie: loopholes created by relatively recent changes to the law) - not for ethical reasons, but because these loopholes haven't had a chance to run through the debugging system, which can ultimately lead to legal repercussions for users. But the average person doesn't really have many opportunities to run into that kind of risky arrangement.

bikebum

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #10 on: May 02, 2014, 01:35:03 PM »
Or you could just disown your child, go to court and have them declared independent.  (Not the healthiest way to go, but that seemed to work well for one of my siblings.)

Reminds me of a friend who mentioned to his wife something like, "Honey, we'd pay a lot less taxes if we got a divorce." Her response was something like, "We are NOT getting a divorce."

bikebum

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #11 on: May 02, 2014, 01:40:06 PM »
So, I admit that I've worked in both the student loan industry and in the tax industry, so maybe I'm biased. But ethics doesn't really enter the picture when it comes to IRS and Dept of Education FAFSA rules - unless you're talking about blatantly lying and committing fraud.

"Gaming" your income is part of the... err... game the government plays with you. If the government doesn't like the loopholes, then the loopholes get closed.

But the truth is, in all likelihood, any way you can legally "game" your income is something that is intentionally built into the system to create incentives for certain kinds of income/saving/spending.

No one is really getting one over on the government. If the government doesn't like what you're doing, it takes you (or someone like you, but probably with a higher income) to court. If it doesn't like the precedent that gets set, it changes the law. More often than not, though, the government is silent on loopholes, which is viewed as a tacit approval.

Someone, somewhere has said, "Hey, I think people might manipulate their income so that there's no EFC." And the reply was, "If people are gaming their income to that extent, then there probably should be no EFC."

I thought this was close to the way it really works. Even so, many people don't think of it this way. Some people still act like I'm doing something sneaky when I mention how much of my income I "hide" from the gov't in retirement accounts.

teen persuasion

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #12 on: May 02, 2014, 04:48:44 PM »
I've been watching the FAFSA rules for a while, now, and they have been in a slow state of flux the entire time.  We used to qualify for the EFC=0 for a few years, until the income limitation went from $32k to $23k midyear.  The asset protection chart numbers have been shrinking each year, not increasing as you'd expect due to inflation.  We used to be eligible to file 1040A (part of qualifying for the simplified no asset test), until the IRS made the 1040 mandatory for HSA owners.  Every year something is a little different.  I just keep on top of the calculations as best I can, and try to look ahead to also see how FIRE might affect aid, good or bad, for the 2 kids we still have at home (oldest is done and 2 currently in college).

Mr. Frugalwoods

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #13 on: May 02, 2014, 05:29:15 PM »
It sure seems like one of the major things you can do is have a paid off house.  If that causes you to draw less income from other sources and also doesn't count as an asset... it's a major benefit.

I'm not clear on whether drawing down Roth contributions affects the FAFSA calculation.  Anyone know?  They aren't taxed like income, but do they count in the calculations?

teen persuasion

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #14 on: May 03, 2014, 11:40:11 AM »
I looked at the paper FAFSA questions, and it specifically asked for AGI, and mother's and father's income (from things like wages and business income, pensions).  Roth income would seem to be invisible.

secondcor521

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #15 on: May 03, 2014, 12:12:24 PM »
I am currently working at a good-paying job and my oldest son is in college now.  I filled out the FAFSA his first year just to see, and we got nothing from that exercise (other than the knowledge that it probably isn't necessary to fill it out for next year).

I have two younger kids who I'd like to see go to college, and I may FIRE before they start.  It has not escaped my notice that with a much lower "income" I may qualify.  I see nothing wrong with that.  As someone said upstream, if the government doesn't like the rules they make or the way I respond to them as a reasonably rational economic actor, they are welcome to change the rules and I'll follow the new ones.

bikebum

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #16 on: May 03, 2014, 12:52:37 PM »
It seems like the responses on this post are mostly saying it's OK. On the posts about student loan forgiveness there seemed to be more resistance to "gaming" the system. Maybe it's just different posters.

Lans Holman

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #17 on: May 03, 2014, 12:59:45 PM »
It sure seems like one of the major things you can do is have a paid off house.  If that causes you to draw less income from other sources and also doesn't count as an asset... it's a major benefit.


That was my takeaway as well.  Might have to take another look at trying to have the house paid off before the kids hit college, if that would give us the option of helping them without affecting the financial aid calculations.

It seems like the responses on this post are mostly saying it's OK. On the posts about student loan forgiveness there seemed to be more resistance to "gaming" the system. Maybe it's just different posters.

Not sure if this is logical or just emotional, but it seems different to me to take money and then not pay it back.  Also, just because your EFC is lowered, that doesn't necessarily equate to free money.  It might just result in more loans. 

bikebum

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Re: Unethical to game Expected Family Contribution for college grants?
« Reply #18 on: May 03, 2014, 02:20:43 PM »
It seems like the responses on this post are mostly saying it's OK. On the posts about student loan forgiveness there seemed to be more resistance to "gaming" the system. Maybe it's just different posters.

Not sure if this is logical or just emotional, but it seems different to me to take money and then not pay it back.  Also, just because your EFC is lowered, that doesn't necessarily equate to free money.  It might just result in more loans.

I think that may be what a lot of people think. I don't see it that way though. AFAIK, student loan forgiveness only forgives part of the loan. A student can get a lot of free money if they have a low or 0 EFC. I don't think taking advantage of student loan forgiveness is any less moral than a family trying to game the EFC. I'm not sure how the math would come out looking at costs to the taxpayers, but I don't see a significant moral difference between taking a loan you may not have to fully repay and accepting free grant money.

Also, as mentioned in one of the other posts, student loans are different than most other loans in the sense that loan forgiveness is built into the terms.