Author Topic: Three college funding questions  (Read 3174 times)

secondcor521

  • Magnum Stache
  • ******
  • Posts: 3113
  • Age: 51
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Three college funding questions
« on: August 14, 2017, 05:24:59 PM »
Hi,

I have a rising HS junior and a rising HS sophomore.  I'm trying to plan ahead for their college expenses in certain ways.

1.  This year (2017) will be the base year for my HS junior for the FAFSA.  Does anyone know for sure what the AGI cutoff for auto-zero EFC will be for the 2019-2020 FAFSA?  I know what it is for the 2017-2018 FAFSA because I can just go look, but I don't know if it will change in two years.  With whom should I check for an authoritative answer?

2.  I also have a 22 year old who is not in college at the moment.  All three of my kids have 529s and ESAs.  Since FAFSA looks at assets as of the day of submittal, why would it not work to move the money from the younger kids' accounts into the 22 year old accounts temporarily (to avoid reporting on FAFSA) then move it back to the younger kids' accounts to then disburse to pay for college expenses (so it counts as a qualified withdrawal because the younger kid has qualified expenses)?

3.  Would it ever make sense to take subsidized loans even if they are not needed, then pay them off with 529/ESA money at graduation?  On the one hand, you get about four years of additional 529/ESA investment earnings for free.  On the other hand, you might have origination fees on the subsidized loans.  Also, I believe there is no way to withdraw from a 529/ESA to pay off loans and have the withdrawal be qualified, so one would have to pay taxes on the earnings.

shawndoggy

  • Bristles
  • ***
  • Posts: 321
Re: Three college funding questions
« Reply #1 on: August 14, 2017, 05:32:24 PM »
preface this with I'm not an expert, BUT

regarding #2....

a. don't you have to re-submit FAFSA every year?  Seems like your theory is a one-and-done at best (once beneficiary designations are moved back to younger kids).

b. I'm pretty sure the EFC takes into account all college aged kids.  22 year old is only not included if not a dependent (I think).  Kids aren't "independent" until out of college or 24, whichever comes first, AFAIK.

SuperSecretName

  • Bristles
  • ***
  • Posts: 262
Re: Three college funding questions
« Reply #2 on: August 14, 2017, 05:34:41 PM »
can't help with answers, but I like your thinking. 

secondcor521

  • Magnum Stache
  • ******
  • Posts: 3113
  • Age: 51
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Three college funding questions
« Reply #3 on: August 14, 2017, 07:07:55 PM »
preface this with I'm not an expert, BUT

regarding #2....

a. don't you have to re-submit FAFSA every year?  Seems like your theory is a one-and-done at best (once beneficiary designations are moved back to younger kids).

b. I'm pretty sure the EFC takes into account all college aged kids.  22 year old is only not included if not a dependent (I think).  Kids aren't "independent" until out of college or 24, whichever comes first, AFAIK.

A.  I'm not talking about changing the beneficiary designations - although that would work too.  I'm talking about moving $$$ from child 2 to child 1 when filling out FAFSA for child 2.  And I don't see why I couldn't do it every year; just lather, rinse repeat.

B.  Well, it takes 22 year old into account as a member of the household size, but not as enrolled in college at the same time.  Not sure what you're getting at exactly.


To spell out the idea behind #2 a little more in step-by-step fashion:

1.  Current situation is, let's say, 22 year old not attending college, 17 year old junior, 15 year old sophomore.  Child 1 has say $50K in 529, child 2 has $50K in 529, child 3 has $50K in 529.
2.  On 9/1/2018, move $49K from child 2 529 to child 1 529 tax free.
3.  On 10/1/2018, file FAFSA for child 2 first year of college - showing $1K in 529.
4.  Receive financial aid offers spring 2019.  Let's say there is $5K that needs to be paid out of pocket for child 2's first year of college.
5.  On 10/1/2019, file FAFSA for child 2's second year of college - showing $1K in 529.
6.  On 11/1/2019, move $5K from child 1's 529 to child 2's 529 tax free.  Withdraw $5K from child 2's 529 and use it to pay $5K out of pocket expenses.  This is a tax free withdrawal to pay for QEE for child 2.

The above can logically be extended to child 3 and to all four years of college in obvious fashion.  It can also extend to ESAs.  The only requirement is that child 1 not go to college (which is my current reality).

I'm just figuring there is some reason this won't work, as it is too obvious of a loophole and I know that the FAFSA and college financial aid folks are really good about closing loopholes.

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6822
  • Location: BC
Re: Three college funding questions
« Reply #4 on: August 14, 2017, 08:37:42 PM »
Point 3 -- I can tell you how my sister did this (different country, similar principal, but the details / facts may be different).

Took subsidized loan of $5000 (example).  In Third year.
Due to thriftiness and ability to get more part time work, only used $1k of the loan. 
$4k left to accumulate for 2.2 years until interest started to accrue again
Each year the new loan application  (like FAFSA) subtracts what was left over from the prior year, so you can only do this one time, really. !! 

Pulled the money out of the investment, and repaid the loan, kept the interest (pays normal taxes on the interest but her income those student years was very low, net of tuition credits).

Bonus -- Because she graduated on time, she received a government grant forgiving about $1500 of the loan value, so she was only required to pay back $5k - $1.5k = $3.5k, and kept the overall interest of $560, and the extra $500 in grant, over what she spent.  Without the subsidized loan, she would have never qualified for the one-off loan forgiveness programs that are randomly assigned retroactively.

The alternative here, parents could have pulled from the education savings fund (like a 529) anytime in her final year to pay off the loan.   You don't have to pull the money at the start of the year, and can use the money for anything.  But, it can be hard to qualify for subsidized loans if there are assets in the 529 and/or the parental income is modestly high.  So you need to know if you would even qualify for a loan if you have the 529...

------  would this work in the USA?  -------



« Last Edit: August 14, 2017, 08:40:05 PM by Goldielocks »

secondcor521

  • Magnum Stache
  • ******
  • Posts: 3113
  • Age: 51
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Three college funding questions
« Reply #5 on: August 14, 2017, 09:49:07 PM »
OK, so I dug through and answered my questions partially.

1.  The amount in the law is $23K but is increased by the CPI.  For 2017-2018, it was $25K, and given that inflation is pretty low, it will probably stay at $25K for next year.  I'll plan on $25K just to be safe; it would be icky if I assumed $26K and it didn't go up.

2.  529s and ESAs are both considered parent assets (in the case I have where I'm the owner and my kids are beneficiaries) and have to be reported as such on the FAFSA even if the beneficiary is a different kid.  So shifting around doesn't matter from a FAFSA point of view.

3.  I still don't know on this one.  The PP appears to be in Canada, and the two countries' laws are different enough to where something like that may work in the USA but whether it actually would is anyone's guess.

teen persuasion

  • Handlebar Stache
  • *****
  • Posts: 1108
Re: Three college funding questions
« Reply #6 on: August 15, 2017, 10:18:15 AM »
OK, so I dug through and answered my questions partially.

1.  The amount in the law is $23K but is increased by the CPI.  For 2017-2018, it was $25K, and given that inflation is pretty low, it will probably stay at $25K for next year.  I'll plan on $25K just to be safe; it would be icky if I assumed $26K and it didn't go up.

2.  529s and ESAs are both considered parent assets (in the case I have where I'm the owner and my kids are beneficiaries) and have to be reported as such on the FAFSA even if the beneficiary is a different kid.  So shifting around doesn't matter from a FAFSA point of view.

3.  I still don't know on this one.  The PP appears to be in Canada, and the two countries' laws are different enough to where something like that may work in the USA but whether it actually would is anyone's guess.
Since you are trying to gauge where the Auto EFC=0 AGI threshold is, I'm assuming you are within striking distance.  Thus you are probably well below the $50k AGI  Simplified Needs Test threshold where assets are NOT required to be reported.  Do you meet one of the other necessary conditions, like able to file 1040A or EZ?

When I've searched for the new EFC calculation data in past years, it's been sometime in May when the charts and thresholds are released, but September before the complete pdf calculation booklet is published.  With the switch to October FAFSA filing, I'm not sure if they've moved the timetable up, but I doubt it. 

The auto EFC=0 threshold was higher in the past - one year they retroactively dropped it from $32k to $23k.  We could easily make ~$30k, but $23k is much harder.  The asset protection charts were also "adjusted" abruptly downward, to ridiculously low levels.  The asset protection amount had been in the neighborhood of $30k for DH's age when DD1 began college in 2008.  The adjustment dropped it to under $10k, maybe $6k-ish?  Lots of parental howling that year, and the asset protection amount was "corrected" somewhat, but still lower than previously.  So while some FAFSA numbers are by law inflation increased annually, some are based on some other criteria.  My best guess is they are somehow tied to interest rates and calculations of annuities.  What looked reasonable for calculating expected family savings decades ago are skewed by current conditions.

You can walk thru the EFC calculations to determine your EFC precisely, since the tax record is already set in stone, just your assets are variable until the date you apply, but if you aren't required to report assets, you are set today.  The booklet has all the methodology, I get the same answer as my kids received officially.  Walking thru it shows you what influences the end result, and where you can adjust things in the future.  Maxing 401k and HSA accounts are a great way to lower AGI to meet the thresholds, as traditional contributions are not added back to income until after the AGI tests.  HSA contributions thru payroll are not reported at all on the FAFSA, but contributions listed on line 25 of the 1040 are added back to income.

secondcor521

  • Magnum Stache
  • ******
  • Posts: 3113
  • Age: 51
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Three college funding questions
« Reply #7 on: August 15, 2017, 11:47:58 AM »
^ Thanks!

Yes, I'm within striking distance of auto-zero EFC and can easily meet the SNT AGI.  Being FIREd, I can dial my AGI around a fair amount.  So I'm thinking this year (which will be my base year) I'd aim for AGI = auto-zero EFC - $1.  It's just a little hard when I don't know for 100% certain what the auto-zero EFC AGI will be before I finalize my taxes in April 2018.

And yes, I meet one of the other conditions.

I did dig up the law (US code title 20 section 1087ss IIRC) and the law says $23K increased by the CPI annually.  So it has crept up to $25K by now.  Of course Congress could in theory change the law between now and then, but I'm going to assume not just to make my life a little simpler.

I think I will go through the calculations, because even with a modest AGI of, say, $30K, the SNT means that your EFC will only be $1K or $2K.

Being FIREd, I don't have the option of 401K or HSA payroll contributions.  For me, the balance is between getting maximum financial aid and doing Roth conversions to keep my Roth pipeline full.

As a side note, I'm a little worried that a zero EFC might damage my son's admission prospects since he would be an "expensive" student for the universities to accept.  I think that calculus will depend more on how he stacks up as an admissions candidate compared to the overall applicant pool and less on how poor we appear on paper.

SuperSecretName

  • Bristles
  • ***
  • Posts: 262
Re: Three college funding questions
« Reply #8 on: August 15, 2017, 11:58:25 AM »
As a side note, I'm a little worried that a zero EFC might damage my son's admission prospects since he would be an "expensive" student for the universities to accept.  I think that calculus will depend more on how he stacks up as an admissions candidate compared to the overall applicant pool and less on how poor we appear on paper.
I don't think they are allowed to factor that into admissions

nobody123

  • Pencil Stache
  • ****
  • Posts: 519
Re: Three college funding questions
« Reply #9 on: August 15, 2017, 12:24:05 PM »
As a side note, I'm a little worried that a zero EFC might damage my son's admission prospects since he would be an "expensive" student for the universities to accept.  I think that calculus will depend more on how he stacks up as an admissions candidate compared to the overall applicant pool and less on how poor we appear on paper.
I don't think they are allowed to factor that into admissions

EFC is irrelevant for admissions.  It's not like the university is required to cut you a break on tuition because the EFC is low.  They are going to get their money one way or another.

Laura33

  • Magnum Stache
  • ******
  • Posts: 2834
  • Location: Mid-Atlantic
Re: Three college funding questions
« Reply #10 on: August 15, 2017, 12:29:37 PM »
As a side note, I'm a little worried that a zero EFC might damage my son's admission prospects since he would be an "expensive" student for the universities to accept.  I think that calculus will depend more on how he stacks up as an admissions candidate compared to the overall applicant pool and less on how poor we appear on paper.
I don't think they are allowed to factor that into admissions

Yes, they are.  I don't know if they do, but they are (unless there is some state law to the contrary).  My alma mater previously was very proud of its need-blind admissions policy, which admitted students regardless of their need, and then agreed to meet the need of all admitted students.  But economics forced them to move away from that.  Now they still commit to meeting the need of all admitted students, but if/when they get towards the end of the process, they have the right to admit more full-pay kids if necessary to meet their income targets.

shawndoggy

  • Bristles
  • ***
  • Posts: 321
Re: Three college funding questions
« Reply #11 on: August 15, 2017, 12:50:48 PM »
Right.  Just the fact that the term "need blind admissions" exists means that some schools don't have it.

teen persuasion

  • Handlebar Stache
  • *****
  • Posts: 1108
Re: Three college funding questions
« Reply #12 on: August 16, 2017, 10:35:10 PM »
Really watch those Roth conversions - they will increase your AGI.  Also watch Roth withdrawals - those are added back to AGI on the FAFSA , even though they are tax free.  When I saw that little bit buried in the fine print I was aghast.  We will likely not do any Roth conversion ladder maneuvers until DS5 is past the FAFSA years.  I'm considering having DH use the Rule of 55 to withdraw from his 401k,  then switch methods after a few years.

We've got a 3 year window with no FAFSA filings between DS4 and DS5, but we are not yet at FIRE to make good use of them for conversions, we'll still have w2 income.  Frustrating.

Oh, another thing we learned - not all schools meet need fully.  DD1 had EFC = 0, but her first choice school gapped her $16k. She appealed, but they just suggested private loans and parent loans.  When we rejected that, they gently suggested she might be happier elsewhere.  She was, at a school nearer to home (yay lower transportation costs) that fully met her need.  EFC = 0 is important to receive full PELL, and TAP in our state.  Essentially, for every $ in EFC, state and fed grants are reduced by a $.  Hit EFC = $5xxx and no TAP or PELL.
« Last Edit: August 16, 2017, 10:52:53 PM by teen persuasion »

secondcor521

  • Magnum Stache
  • ******
  • Posts: 3113
  • Age: 51
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Three college funding questions
« Reply #13 on: August 17, 2017, 01:43:00 PM »
^ Yup.  I am aware that Roth conversions add to AGI.  Basically, I have a very low AGI without them, and so the question over the next few years is whether I choose very low Roth conversions to get max financial aid but possibly starve my Roth pipeline, or higher Roth conversions to maintain my pipeline but lose out on some financial aid.  Or anywhere on that spectrum.

I am inclined to think that the base FAFSA years for their freshman years are the most important, since that is when the most aid is provided.  Later years the awards could be reduced, so they seem proportionately less important.

I was not aware that Roth IRA withdrawals count as tax-free income.  It makes sense, though.  Luckily in my case at least I shouldn't need to do any Roth IRA withdrawals during the FAFSA years.

It seems most schools (presumably strapped for cash) only meet a percentage of need.  The last school we visited meets an aggregate average of 65%.  Most if not all students get some aid, probably very few (the most desirable) students get full aid, and everyone else gets gapped to some degree or another.  I know it's a balancing act for the schools trying to get the best student body for the lowest cost, while also making their overall budget work.  I'm just struggling to find the right strategy on my end.  I've bee reading a lot lately and there is much out there that is contradictory, even amongst the experts.

teen persuasion

  • Handlebar Stache
  • *****
  • Posts: 1108
Re: Three college funding questions
« Reply #14 on: August 17, 2017, 08:42:15 PM »
Well, not all aid comes out of the college's pockets.  First is federal loans, then work study, then federal grants like PELL, and state grants like TAP.  Merit scholarships and institutional grants are probably last.  But gapping rates definitely vary by school.  Some schools are competitive on aid: DS2 got a good package from his first choice school, but a slightly better package from his second choice.  He contacted the first choice and explained the dilemma, and asked if they could match the better offer.  They asked to see the offer, and beat it.  His school was excellent about finding him more aid to help cover a summer semester he needed to catch up after switching majors.  Their food plans were much more flexible than those at his sister's school (he could cash out unused swipes weekly, hers was use it or lose it), and there were more economical housing options (including by the week, for odd summer sessions).

Generally, I've found that every school is different in various ways from the others (so far, 4 different kids, 4 different schools in 3 different cities).  There is almost no "normal" college.