Help scheming: Windfall during FAFSA year and generally what to do with it.

[szmaine]

Hi All.

I have a rapidly changing life/financial situation that has arisen due the death of my husband last year coupled with a financial "windfall". I think I've been pretty adept at handling things as they evolve but have some ideas I want to run by you guys.

Relevant financials:  Husband had inherited from mother prior to his own death. 50K sitting in checking (0% interest) and 1/4 share in a 400K condo (probating now, closing this month) so about 100K coming at me after the 3 month creditor notification wait.

As far as the money sitting in the checking I've been attempting to deal with that by increasing my 403(b) contributions to the max 18K but was having a hard time making a dent in it due to selling his possessions (wicked collector/hoarder) and receiving SS death benefit for minor daughter. I also just opened a 457(b) as I just discovered that I could max both at 18K, but because I just figured it out I probably will only manage to cram 14K in there this year this will probably help move the money faster than it comes in from the selling of things, etc. Also, I did max a ROTH for the year. Other than that, I relocated it to the highest interest accounts I could find and plan to spend some on a new roof (~6K).

But then, there is this new pile coming at me while we are approaching FAFSA year for daughter (or maybe we are in it already, not sure).

So I had this idea. Since I want to sell the house and move closer to work after DD graduates HS next year (45 min commute to work and college where DD will probably go) I wondered if it might make sense to refinance and put a big chunk into the house at the same time.

Current mortgage is a 30 yrs about 87K @ 4.78, about 4K/yr, P&I = $580 per month.  If I refinanced into a 15yr, lets say for example... 30K @ 3% the interest is about 850/yr, P&I $200/mo. (I only mention the per yr because I can see that we could stay as long as 2 yrs) and would cost about 2K at my credit union. So at one year, the refi cost me slightly less than the interest I'd have payed AND sinks 50K (for example) out of FAFSA reckoning.

I was sorry to learn that FAFSA will add back in all my voluntary retirement contributions for the FAFSA year and count them as assets (as un-taxed income). But getting the money from the property sale is really bad timing for us and I think because I am both personal representative of his estate and sole beneficiary that I could "disperse" it to myself directly into the refi without it ever coming into my bank account.

Thoughts, comments, ideas?????

[historienne]

When, precisely, would your daughter plan to start college?  The timing will matter a lot here.  It may end up being financially advantageous to have her do a gap year of some sort so that the FAFSA year is later.

[dandarc]

Why not just pay the house off?  If I'm reading this right, you'll have ~$150K between the checking and the proceeds from the condo.  Only takes 87K to pay off house.  Shelter even more from FAFSA consideration, and you're planning on moving soon any way.

[szmaine]

When, precisely, would your daughter plan to start college?  The timing will matter a lot here.  It may end up being financially advantageous to have her do a gap year of some sort so that the FAFSA year is later.

Yes, we might do a gap year anyway, she is one of the youngest anyway having started just before the age cut-off and she has asperger's which compounds that but also makes life more complicated because she needs to be doing something besides sitting around on Tumbler for a year. Looking into voc rehab for her..summer job maybe....anyway, a gap year would solve the problem of the $ coming into the bank acct initially.

[seattlecyclone]

I agree with just paying off the house. This shelters the maximum amount of assets and has the added bonus of not making you go through loan paperwork all over again for a house you might not even be living in much longer.

I don't think you need to worry about whether or not the assets hit your bank account before they go into the house. The FAFSA asks you to report your income for the previous calendar year, and your assets as of the date you fill out the form. With a kid graduating in 2016, that means you'll be filling out the form in early 2016 using your assets of that date and your 2015 income. Get the house transaction done before you fill out the form and you won't have to report that money. Also keep up with the retirement contributions. You're right that you have to add those back in as income, but that money won't then be double-counting as assets anymore.

Remember that there's not just one "FAFSA year." You'll need to fill out a new FAFSA for each year you apply for financial aid. That means that if you move more of your assets into retirement accounts while your daughter is in college, it could potentially improve her financial aid picture each year she's in school. This also means you'll need to think about how changing houses once your daughter is in school will affect things. Moving closer to work is great, and downsizing your house once you have no more kids living with you is also a good thing. Don't buy an unnecessarily large house just to get more financial aid; it likely won't be worth it. Just be aware of how this change will affect your FAFSA-reportable assets.

[szmaine]

Why not just pay the house off?  If I'm reading this right, you'll have ~$150K between the checking and the proceeds from the condo.  Only takes 87K to pay off house.  Shelter even more from FAFSA consideration, and you're planning on moving soon any way.

I didn't let mind go that far (chicken???)...but I am now. It seems such a scary thing to do but makes an awful lot of sense really...or maybe pay it down to the point that just a year or two worth of payments are left, then I'd have the same monthly payment (with minimal interest)...is there a place on FAFSA where they have you put in your monthly mortgage payment?

[szmaine]

I agree with just paying off the house. This shelters the maximum amount of assets and has the added bonus of not making you go through loan paperwork all over again for a house you might not even be living in much longer.

I don't think you need to worry about whether or not the assets hit your bank account before they go into the house. The FAFSA asks you to report your income for the previous calendar year, and your assets as of the date you fill out the form. With a kid graduating in 2016, that means you'll be filling out the form in early 2016 using your assets of that date and your 2015 income. Get the house transaction done before you fill out the form and you won't have to report that money. Also keep up with the retirement contributions. You're right that you have to add those back in as income, but that money won't then be double-counting as assets anymore.

Remember that there's not just one "FAFSA year." You'll need to fill out a new FAFSA for each year you apply for financial aid. That means that if you move more of your assets into retirement accounts while your daughter is in college, it could potentially improve her financial aid picture each year she's in school. This also means you'll need to think about how changing houses once your daughter is in school will affect things. Moving closer to work is great, and downsizing your house once you have no more kids living with you is also a good thing. Don't buy an unnecessarily large house just to get more financial aid; it likely won't be worth it. Just be aware of how this change will affect your FAFSA-reportable assets.

Hmmm....so I guess that means when I move I'd either have to sink it in the new mortgage or get less FA for her in some year if I chose to recover some to funnel more into retirement account. Since I can only get 36K in per year, I could play with the #'s on that when the time comes. The thing is that I'd really prefer to have all that money into my retirement accounts vs sunk into a mortgage.

No I don't want more house and would never buy one to big just to get more FA.

[seattlecyclone]

I didn't let mind go that far (chicken???)...but I am now. It seems such a scary thing to do but makes an awful lot of sense really...or maybe pay it down to the point that just a year or two worth of payments are left, then I'd have the same monthly payment (with minimal interest)...is there a place on FAFSA where they have you put in your monthly mortgage payment?

Take a look for yourself. It looks like the only expense they ask about is child support payments. It's better for the FAFSA to have no mortgage and $50k in the bank than it is to have a $100k mortgage and $150k in the bank.

[fruplicity]

It sounds like she's entering school in Fall 2016? Then they will ask for/look at all of your calendar year 2015 information. Is the school only a FAFSA school or a CSS PROFILE school too? (https://profileonline.collegeboard.org/prf/PXRemotePartInstitutionServlet/PXRemotePartInstitutionServlet.srv) PROFILE asks about your mortgage and home value but FAFSA doesn't. So if it's a FAFSA school, it may make sense to pay down the mortgage.  Also FAFSA only expects you to report balance of cash/savings/investments on the day you complete it, so you can also buy other things you might need anyway, like a car, computer, etc. A PROFILE school may offer more understanding/flexibility in your situation if you describe in the "special circumstances" box what has happened and later follow up with the office.

Either way I recommend plugging in some numbers to the school's net price calculator - it's supposed to be "easily found" on school websites but it's kind of rare so I recommend just google "School name net price calculator" or look it up through this website: http://www.thecollegenavigator.com/ It's a federal requirement for schools to have but some schools take better care of it than others...

There's a chance if it's a FAFSA only school it might not have a lot of financially need-based money to give anyway. But if it offers merit aid and your child is a strong student you might get $$$ regardless of your FAFSA results.

Good luck!

[dandarc]

This whole "assets" as of the day you fill out form seems ripe for abuse.  Seems the smart move is to buy anything you know daughter is going to need for college before the day you fill the form out.  Maybe school requires a computer and she doesn't have one yet, or there are some books you can buy in advance, if you know enough about the classes she'll sign up for in time.

Several less-honest ways to move some money out of the required accounts temporarily come to mind as well.

[Axecleaver]

If the condo sale is going to count as income for you this year, that will more than likely cause your EFC to be so high as to make your student ineligible for aid. Gap year, or a part-time scenario (take a few classes at a community college or low cost state school you fund with cash) is probably best. But, definitely talk to both admissions and the financial aid office, they may have some ideas about what you can do.

Here's the formula used by the FAFSA to determine Expected Family Contribution (EFC): http://www.ifap.ed.gov/efcformulaguide/091913EFCFormulaGuide1415.html. You can see from that link that income counts way, way more than assets do: 47% for income vs 12% for parental assets.

It's complicated, so I'm going to make some assumptions which could be wrong. For income, you get a deduction for taxes you paid, $4k for employment expenses, and an income disregard of 17,440 (for a household of two). Then add retirement contributions as untaxed income. Whatever is left is counted at roughly 47% x (AGI + retirement - taxes paid - 21,440). From the condo sale, depending on how the tax situation works, that is probably counted as part of your income this year.

For assets, you get a small exemption for a one-parent household of about 7k, then it's 12% of your assets. If you have a business, the business is counted as an asset at 40% of value up to 125k (this totally sucks, by the way - you shouldn't have to liquidate a family business to pay for college).

Since the home value is exempted from this asset calculation, as other posters have mentioned, dumping money against the mortgage is a safe and easy way to avoid asset raiding. But, your income this year is probably going to take your EFC way, way up to the point where you won't get any aid regardless of how much you have in assets.

[mblock]

szmaine,

Because the FAFSA is meant to be a snapshot of of your family's ability to contribute to your daughter's education, most school's will allow documentation to be submitted to handle job loss/layoffs and windfall situations (even FAFSA only schools generally have this option). I work as a Financial Aid administrator and we use a "Special Circumstance Request for Review" form in our office to help students understand what documentation they would need for us to be able to apply changes. This form is meant to document a situation where a student/parent's current financial situation differs from their previous tax year. If upon review of proper documentation it is found that an adjustment is needed to a student's FAFSA, we are able to do so.

Are you certain that your daughter would be eligible for grants and/or subsidized loans without these windfalls considered to begin with? FAFSA provides an EFC estimating tool at https://fafsa.ed.gov/FAFSA/app/f4cForm that is very helpful. As previously mentioned, the formula for EFC is quite convoluted and the tool makes it much easier to get a rough estimate (it's also a nice way to know what info you'll eventually need when it's time to fill out the real thing). If she would be eligible (or the school offers need-based scholarship opportunities) I would reach out to the prospective school and determine what their process is for reviewing these types of situations (every school is different and their office will be trained on their specific policies). Some schools are stricter than others on documentation, some will only consider job losses and not windfalls, etc. This could help you avoid moving the money around unnecessarily/investing into less than ideal situations. As previously mentioned, also take a look at their cost calculator and keep in mind that these are generally going to overstate the costs (i.e. find the books online instead of buying from campus bookstore, pack your lunch instead of getting a meal plan if allowed, etc), though they are a great place to start.

Axecleaver - Small family businesses aren't required to be reported (under 100 employees). See here: http://www.finaid.org/fafsa/smallbusiness.phtml. Though I know it is a field that is certainly confusing and has caused many of our students to over-report their assets (along with them over-reporting assets held in retirement accounts, which are also exempt).

[seattlecyclone]

Your income this year is probably going to take your EFC way, way up to the point where you won't get any aid regardless of how much you have in assets.

How do you figure? Inheritance doesn't count as income. The sale of the condo will only count as income to the extent that the proceeds from the sale exceed the value on the date of inheritance. The inheritance will add to the OP's assets, but it should hardly affect income one bit.

[szmaine]

Your income this year is probably going to take your EFC way, way up to the point where you won't get any aid regardless of how much you have in assets.

How do you figure? Inheritance doesn't count as income. The sale of the condo will only count as income to the extent that the proceeds from the sale exceed the value on the date of inheritance. The inheritance will add to the OP's assets, but it should hardly affect income one bit.

That's right there will be little to no capitol gains since the property was appraised last summer when he inherited it from his mother(stepped up basis). The tiny bit more will be negated by the cost of selling I assume. Also, there will be an estate return for that anyway and so it wont be on my tax return.

[szmaine]

szmaine,

Because the FAFSA is meant to be a snapshot of of your family's ability to contribute to your daughter's education, most school's will allow documentation to be submitted to handle job loss/layoffs and windfall situations (even FAFSA only schools generally have this option). I work as a Financial Aid administrator and we use a "Special Circumstance Request for Review" form in our office to help students understand what documentation they would need for us to be able to apply changes. This form is meant to document a situation where a student/parent's current financial situation differs from their previous tax year. If upon review of proper documentation it is found that an adjustment is needed to a student's FAFSA, we are able to do so.

Are you certain that your daughter would be eligible for grants and/or subsidized loans without these windfalls considered to begin with? FAFSA provides an EFC estimating tool at https://fafsa.ed.gov/FAFSA/app/f4cForm that is very helpful. As previously mentioned, the formula for EFC is quite convoluted and the tool makes it much easier to get a rough estimate (it's also a nice way to know what info you'll eventually need when it's time to fill out the real thing). If she would be eligible (or the school offers need-based scholarship opportunities) I would reach out to the prospective school and determine what their process is for reviewing these types of situations (every school is different and their office will be trained on their specific policies). Some schools are stricter than others on documentation, some will only consider job losses and not windfalls, etc. This could help you avoid moving the money around unnecessarily/investing into less than ideal situations. As previously mentioned, also take a look at their cost calculator and keep in mind that these are generally going to overstate the costs (i.e. find the books online instead of buying from campus bookstore, pack your lunch instead of getting a meal plan if allowed, etc), though they are a great place to start.

Axecleaver - Small family businesses aren't required to be reported (under 100 employees). See here: http://www.finaid.org/fafsa/smallbusiness.phtml. Though I know it is a field that is certainly confusing and has caused many of our students to over-report their assets (along with them over-reporting assets held in retirement accounts, which are also exempt).

The link you provided suggest that she'd get a pell grant for for a significant amount. Also, I should mention that as an employee of this university I'd get 50% tuition reduction for her so it not as dire financially as for some...but I do want to do even better if I can.

[mblock]

In that case I'd definitely verify if the school's Financial Aid office has a procedure in place to account for the windfall. If not, it may be in your best interest to play around with the EFC estimating tool to determine where best to invest/move the money to help your daughter maximize her Pell grant. Navigating the financial aid forms and procedures can be cumbersome, but it will definitely pay off if she's able to qualify for a Pell grant. Good luck and good luck to your daughter!

[Axecleaver]

Axecleaver - Small family businesses aren't required to be reported (under 100 employees)

mblock - thanks for that link about small business exclusions, I learned something new and important today!

The inheritance will add to the OP's assets, but it should hardly affect income one bit

I was assuming it would count as capital gains - which was wrong.

Seems like the 12% of assets measure is still going to bite you, but not nearly as bad as it would be if it were income.

[szmaine]

Thanks for all the helpful replies! Lots to think about...but am definitely leaning toward paying off the house when the funds become available. I got time to mull it over before that happens.

[szmaine]

Well, I did it! I just payed off the house!! It was kind of scary but in a good way. Yay!

Thanks for the help in reaching this decision! It makes so much sense for our situation in so many ways FAFSA assets but also, when we sell in couple years I have the flexibility if I to recover the ability to invest more of it in tax-advantaged accounts...right now I have enough going in that my taxes will less than 0 with an EITC but that will change when I lose Head of Households status.

[dandarc]

Congratulations!