How to manipulate your finances to game the FAFSA student aid calculations?

[Mr. Frugalwoods]

Inspired by the spirited discussion here:

http://forum.mrmoneymustache.com/welcome-to-the-forum/paying-for-childrens'-college-when-you-have-no-savings/

I started wondering how someone who is FIRE (maybe for many years) could massage their financial landscape into something that presents a sympathetic face to university financial aid departments.

The basic idea would be to use "retirement" assets to live off of during the college years of your kids.  The FAFSA calculations do not take into account the retirement savings of the parents when calculating the EFC (Expected Family Contribution).

So combining that with some classic mustachian tax avoidance plans I came up with this:

• Execute a roth conversion pipeline (hopefully for many years)
• Use up your taxable investments for your living expenses
• Whatever is left in taxable the year before college dump into your home equity / pay off mortgage / spend on big home repairs / buy a nice (used!) car to last you for the next 10 years / ??
• Live off of roth withdrawals during the college years, continue to fund the roth pipeline up to the 0% EFC income level ($24k/year)
• Continue to live off your roth pipeline until you hit 59 1/2

I could imagine shielding assets in other ways though.  Since we're planning a rural homestead I could see buying several second hand (but still very expensive) tractors which will predictably avoid depreciation over the medium term right before filling out the FAFSA.

Heck, for that matter, any personal non-cash asset with a stable market (I guess that's the rub) could theoretically be used to shield your assets during the college period.

Disclaimer: I'm a financial tinkerer, and even more so a financial roadmap optimizer.  This is all hypothetical.  There are no Frugalwoods kids at the moment, so this is at least 18 years away... during which time the rules will almost certainly change.

But I still think it's a fun question.

Does this make numerical sense?  Practical sense?  Ethical sense?

[retired?]

I think, somewhat, the idea of spending time on a hypothetical question is annoying to people on this forum.  Their time is not hypothetical......and, it seems you have a decent grasp of the college cost game.

So, I'll get the response number up to 1. 

[randymarsh]

Best manipulation would be for the student to marry another student. Parental income and assets no longer matter. I wish I would have considered this more seriously 4 years ago, as my best friend happens to be opposite-sex. Now I believe you could do it with a same-sex friend due to the recent court rulings.

[sol]

The big obvious answer is to be sure to retire before your kids apply for financial aid.  Probably at least one year ahead of time, so that your tax returns show no earned income.  The general rule of thumb is that a parent is expected up to 40% of their income but only 5% of their assets, per year.   So get your income down first.

The other strategy that appears to be common with families of significant wealth but questionable morals is generational wealth transfers.  A student's assets are strongly depleted for college.  A parent's assets are somewhat depleted.  A grandparent's or uncle's assets are usually ignored.  So if they have a large and close family, for example a family-owned business with joint ownership, they just transfer all of the assets out of the name of the student and the parents for a few years, and then transfer it back afterwards. 

[teen persuasion]

Best manipulation would be for the student to marry another student. Parental income and assets no longer matter. I wish I would have considered this more seriously 4 years ago, as my best friend happens to be opposite-sex. Now I believe you could do it with a same-sex friend due to the recent court rulings.

The formula for EFC for independent students is much different than for dependent students, it might not be better.  There is no auto EFC=0 for married w/o other dependents.  Adjusted income is assessed at 50%.  For married but under 24, there is $0 asset protection, and then assets are assessed at 20%.  Even the income adjustments are different.

[retired?]

The big obvious answer is to be sure to retire before your kids apply for financial aid.  Probably at least one year ahead of time, so that your tax returns show no earned income.  The general rule of thumb is that a parent is expected up to 40% of their income but only 5% of their assets, per year.   So get your income down first.

The other strategy that appears to be common with families of significant wealth but questionable morals is generational wealth transfers.  A student's assets are strongly depleted for college.  A parent's assets are somewhat depleted.  A grandparent's or uncle's assets are usually ignored.  So if they have a large and close family, for example a family-owned business with joint ownership, they just transfer all of the assets out of the name of the student and the parents for a few years, and then transfer it back afterwards.

Sol, you appear to make moral judgements of other people's morals.  How much should one pay?  My view is along the lines of "I didn't create the rules, but will plau y by them".  Do you overpay your federal taxes?

[climber1]

The formula for EFC for independent students is much different than for dependent students, it might not be better.  There is no auto EFC=0 for married w/o other dependents.  Adjusted income is assessed at 50%.  For married but under 24, there is $0 asset protection, and then assets are assessed at 20%.  Even the income adjustments are different.

The percentage rates are higher, but for the common situation where the student has very little assets and the parents have a large income and large savings, it can definitely result in a much lower EFC. I think I will mention this to my younger brother in his senior year or high school. I highly doubt he will take it seriously, but his reaction should be amusing.

[sol]

Sol, you appear to make moral judgements of other people's morals.

Yes, I do.  Don't we all?  Isn't that what morals are for?

How much should one pay? 

I'm of the opinion that college admissions should be 100% subsidized by government for the top 50% of the population, so my personal answer to that question is "$0".

But even failing that, I'm all for playing by the rules as they are written.  Hiding wealth by temporarily giving it away to someone with the plan that they will give it back is just deliberately breaking the rules, though.  No one wants to pay taxes either, but there's a difference between paying the legally required minimum amount and committing tax fraud. 

[sol]

Some sites suggest that the FAFSA offers total asset protection for families that make less than $50k in the year before they apply.  So if you can get your "income" down that low, maybe it doesn't matter that you have a 2mil stash.

[Setters-r-Better]

Does anybody know how step-parent income is treated?

[lakemom]

Keep in mind that even if you get the EFC on the FASFA to $0 does not mean the student ends up going to college "free."  The financial aid package will work out to where the PARENTS do not 'have to' spend any money out of pocket BUT the student will be offered a combination of grants/scholarships/loans (federal and/or university).  Our experience is that much more in loans is offered these days because of the ease (no qualifying) of recieving them.  Universities want to preseve as much of their income earning funds as possible so as long as the government is going to give the kids money the uni's encourage it.  We've had kids in college for the past 10 years (we have 6 with #4 a sophmore and 5 & 6 still a few years away from college) with income ranging from $50k up to 100k and ONLY when we were near the 50k mark and had TWO students in college did the EFC hit $0 and neither of them got more in grants/scholarships just more in loans.  Even last year with 2 in college and an income of $85k our EFC was 7k EACH. 

Best ways to cover college expenses.....
Don't have so many kids and save early and often for the ones you do have.
Encourage any who have an interest to pursue military service.
Make them work and save while in High School and College.
If its a choice you make, let them know early and often that YOU will not be paying for the college education so THEY need a plan.
Be sure to explore any and all alternatives as they reach their high school years (community college, online courses, trade schools, etc.)
Move to an area with an excellent university/college so they can live at home while in college.

[teen persuasion]

I googled "paper FAFSA" to find all the questions asked on the FAFSA, even though it is all online now.  I can't seem to post a link from my tablet.

If your legal parent is widowed and remarried, report info on that parent and stepparent.  If parents are  divorced and remarried, report info on parent you live with the most time (if same amount of time, then parent who provides most support) + stepparent.

[jka468]

While I'm no proponent of the current college system, with exorbitant costs that are barely justifiable, trying to bilk the system like this is no better than being a welfare queen. You can tell yourself different, but let's be real.

[teen persuasion]

Some sites suggest that the FAFSA offers total asset protection for families that make less than $50k in the year before they apply.  So if you can get your "income" down that low, maybe it doesn't matter that you have a 2mil stash.

This is the Simplified Needs Test.  If AGI is < $50k, AND the family meets one of the following items, assets are ignored: not required to file 1040 (file 1040A or EZ), eligible for SSI, WIC, TANF, free/reduced lunches, or are a dislocated worker.

It can be hard to meet one of the additional requirements.  Quitting work does not make you a dislocated worker, must be fired/laid off.  If you have an HSA, you are required to file 1040.

 We have been eligible for free or reduced lunches, with our five kids, but one by one the kids are moving out, graduating, and otherwise dropping our family size down.  DS5 is much younger than the others, he will effectively be an only child by the time he reaches college age, and it will be an entirely different ballgame with him.

[GetItRight]

How much should one pay? 

I'm of the opinion that college admissions should be 100% subsidized by government for the top 50% of the population, so my personal answer to that question is "$0".

But even failing that, I'm all for playing by the rules as they are written.  Hiding wealth by temporarily giving it away to someone with the plan that they will give it back is just deliberately breaking the rules, though.  No one wants to pay taxes either, but there's a difference between paying the legally required minimum amount and committing tax fraud.

So you are of the opinion that violence is ok, people should be robbed at gunpoint so others can go to college without having to work or pay for it. Quite a bold statement for someone claiming to make moral judgements. Why do you believe aggressive violence is morally permissible for this purpose?

If it is because college is expensive then perhaps a look at the cause of that would be worthwhile, government subsidy has increased the cost of college... For starters easy loans for large sums and not backed by any assets to people with little income or assets. Banks would never make these loans if the government didn't ensure banks would get the money back by ensuring the debt can never be discharged under bankruptcy and otherwise insuring the loan. The loans would never be approved for such huge amounts and colleges would be forced back into a free market where they would have to compete on quality/price/value. Sure the banks and the higher ups at colleges would lose out on the gravy train, but students would gain a lot as would teachers (the good ones, not so much the tenure and done type).

My point is that violence certainly not the moral way. Under a system backed with coercion and violence, shuffling assets around so less is stolen from you is a good thing if there is no violation of the letter of the law.

[Cheddar Stacker]

Does this make numerical sense?  Practical sense?  Ethical sense?

Yes. I think it's a good plan Frugalwoods'.

Counter questions for the "ethical" discussion folks: Is it ethical for a professor to mandate the purchase of a textbook without first checking the price, which just happens to be $400? Is it ethical for colleges to continually raise tuition at a rate of 4x inflation?

Personally, I'm hoping that when my kids reach college age higher education looks more like the comments section of this blog post from Jeremy:
http://www.gocurrycracker.com/is-college-worth-it-with-future-tuition-predictions/

[highcountry]

Though college should not cost what it does for good students, there simply is not enough aid to go around at the moment.  Middle class parents deliberately manipulating the system so that their kids get a larger slice of the financial aid pie means that some other student will be unable to attend at all because they actually needed the help.

[sol]

So you are of the opinion that violence is ok.. Why do you believe aggressive violence is morally permissible for this purpose?

If you are seriously equating taxation with "aggressive violence" then I think our discussion is finished.  That kind of statement is not only factually incorrect, it is offensive to those of us who have been victimized by actual violence. 

[teen persuasion]

Whatever is left in taxable the year before college dump into your home equity / pay off mortgage / spend on big home repairs / buy a nice (used!) car to last you for the next 10 years / ??

Make that two years before college.  For example: DS4 is currently a Jr in HS.  He will begin college in September of 2016.  He will fill out the FAFSA in January of 2016.  It will be based on our 2015 tax info.  So any taxable manoeuvres must be completed now, in 2014, to stay off our 2015 tax returns.

 Of course, DS2 is a senior in college now.  This year doesn't matter at all for him, aid-wise.

[hdatontodo]

Though college should not cost what it does for good students, there simply is not enough aid to go around at the moment.  Middle class parents deliberately manipulating the system so that their kids get a larger slice of the financial aid pie means that some other student will be unable to attend at all because they actually needed the help.

That point has validity from the rich vs poor perspective. However, if the two groups being compared are savers vs spenders at the same income level, spenders shouldn't make out better.

[historienne]

Counter questions for the "ethical" discussion folks: Is it ethical for a professor to mandate the purchase of a textbook without first checking the price, which just happens to be $400?

No, but this is a straw man.  Trust me, professors do consider price when choosing textbooks (if only because, since we are not stupid, we realize that students are much more likely to buy and read the textbook if it is affordable, and it is absolutely in our own interest to have students do well in our classes). 

As for the question about raising prices faster than inflation - at least at public schools, that's because pretty much every state has massively slashed subsidies for higher education over the last decade.  It's not magically cheaper to run the university, so those funding cuts get made up by tuition raises.  If you want to do something about it, call your state legislator.

[Scandium]

Counter questions for the "ethical" discussion folks: Is it ethical for a professor to mandate the purchase of a textbook without first checking the price, which just happens to be $400?

No, but this is a straw man.  Trust me, professors do consider price when choosing textbooks (if only because, since we are not stupid, we realize that students are much more likely to buy and read the textbook if it is affordable, and it is absolutely in our own interest to have students do well in our classes). 

As for the question about raising prices faster than inflation - at least at public schools, that's because pretty much every state has massively slashed subsidies for higher education over the last decade.  It's not magically cheaper to run the university, so those funding cuts get made up by tuition raises.  If you want to do something about it, call your state legislator.

Nono, the professor require the $400 book that he or she wrote, and get a cut of the sales of!

[retired?]

Though college should not cost what it does for good students, there simply is not enough aid to go around at the moment.  Middle class parents deliberately manipulating the system so that their kids get a larger slice of the financial aid pie means that some other student will be unable to attend at all because they actually needed the help.

That point has validity from the rich vs poor perspective. However, if the two groups being compared are savers vs spenders at the same income level, spenders shouldn't make out better.

Fully agree.  The system punishes those that actually saved for themselves.  My point RE using the rules to ones advantage is that FAFSA and many govt systems (IRS) create incentives and often have unintended consequences.  Loopholes can be closed - why not count assets more or primary home? 

Sol, you appear to make moral judgements of other people's morals.

Yes, I do.  Don't we all?  Isn't that what morals are for?

How much should one pay? 

I'm of the opinion that college admissions should be 100% subsidized by government for the top 50% of the population, so my personal answer to that question is "$0".

But even failing that, I'm all for playing by the rules as they are written.  Hiding wealth by temporarily giving it away to someone with the plan that they will give it back is just deliberately breaking the rules, though.  No one wants to pay taxes either, but there's a difference between paying the legally required minimum amount and committing tax fraud. 

RE first response, yes, I admit, stupid comment.  Brain wasn't on. 

RE second paragraph, I think the process could close those sorts of loopholes.  Perhaps the cost/effort is not considered worthwhile.

Side comment - way too many people are attending college at this point.  It is amazing how there is a college for any skill level or work ethic.  Look out for student loan bubble.  I have my doubts regarding students not be able to attend college due to cost.  The aid game has become another form of wealth redistribution.  If student A pays less than B, in some sense B has paid for a part of A's education.