Author Topic: Structuring your kids asset while saving for college and thinking about FAFSA  (Read 18254 times)

Mister Fancypants

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I posted in this thread earlier today http://forum.mrmoneymustache.com/investor-alley/how-much-to-save-for-kid's-education/msg376372/#new

I am about to start the college savings process for my twins. Both my wife and I had our educations paid for and think the best gift you can give your child is a debt free start to adult life. I am not here to debate that point, I plan on fully funding my children's education through graduate school is they choose to attend.

Both my wife and I attended state schools, although my wife got her PhD from an Ivy, my SIL and FIL both went to Ivy's so we have a mix of state and Ivy education in the family, so I plan on having the assets put away to fully fund 2 Ivy League educations simultaneously. My children have not started school yet so it is too early to tell if the Ivy's are in there future however based on family history and "how advanced" they are so far it is a strong possibility.

Generally speaking my tax sheltered accounts are fully funded, and retirement is accounted for, my mortgage will be paid off by the time my twins are ~15 years old. We are FI by most people's standards just working for the mortgage and the college savings.

So on to college funding, all the 529 calculators pretty much says its ~$1000 a month to fund and Ivy education per kid. That's $24k a year in savings plus I need to do some catch up since they are not newborns. I can backload a bit since I will be mortgage free when they are 15, but that only gives me between 3 and 7 years not a lot of time to make it up. That is still pretty steep probably a bit more than the free cash I had planned to putting into college savings. Grandparents are also funding 529's which will buffer this not calculating for that as its not their responsibility, however if/when these accounts become substantial they will be accounted for. These accounts will become substantial based on our families.

Our problem is my kids will have there own assets and I'm not sure how to shelter/structure them. I know FAFSA looks at parent assets vs child assets differently and then Profile schools and 568 schools do things differently again.

So I know my retirement accounts are safe harbor off limits and my home equity is also not part of the calculation (some formulas look at it but only at 1.2x salary which is a small cap nowhere near the amount of equity we have). So my taxable assets are the only real concern and I am only expected to pay 5.64% per year, and bonus I have 2 kids same time so I get the max allowance so my taxable assets compared to my salary actually puts me in the aid realm for most schools to some extent. Now if we go the state school route the 529's will cover everything so I'm not worrying about it, however if they do make a Princeton or Harvard I am thinking I am going to run short and here is where my problem comes.

My kids have assets... A lot of them or they will anyway. They are the beneficiaries of an insurance policy that pays them ~$550 a month until they are 18, so based on a 7% return they will have just shy of a $250k each upon going to college. Their assets are measured at 20% so they will be on the line for everything... no institutional aid will be available. The insurance is actually paid to my wife in c/o my children we have no need for the money so we were just going to open up UTMA brokerage accounts for them once the amount built up enough to be worthwhile... Then I read the FAFSA stuff and said oh no.... that could be a huge mistake. So then I was thinking maybe a living trust with them as beneficiaries after they graduate at 25, gives me more control anyway make sure they are good with money... As long as the Trusts are revocable I think this keeps the assets in my name not theirs for reporting purposes, but if they are beneficiaries of my Trust still screwed.

Sorry kinda long winded... Not sure what do with my kids money now its not for me... I don't plan on spending on their college want it to be theirs when they are adults, UTMA Brokerage accounts will kill FAFSA down the road, Trusts might be an option but don't know enough, might just be a more complicated way to kill FAFSA and lose some Kiddie tax advantage in the short term.

So if you know more about Trusts and FAFSA or have any other ideas please feel free to let me know... I know my first world problems are very earth shattering. :P

-Mister FancyPants

Sblak

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I am interested in this thread as well. 

I went to school to become a lawyer hoping to work as an estate planner.  I instead became a tax litigator.  I know enough to be curious about an answer to how to best pay for kids' college, but not enough to help provide advice.  If I knew, I probably would not give out tailored advice over the internet. 

My recommendation is to find a really good estate planner in your local area, and set up a meeting to get help setting up trusts/accounts with the benefits you need.

sandandsun

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I work in higher ed, indirectly with financial aid awarding, and you probably need professional advice on this.  You are right to want to keep the assets out of kids names for fafsa reporting purposes... Any student assets are viewed as fair game and the theory is those should be used to cover college costs... So if they have assets in their name, they will get little to no aid until those are exhausted.
I would talk with a professional who has some experience with both fafsa and trusts... But usually professionals who are well versed in one area know little about the other  : (

SpicyMcHaggus

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Do you want to hide those assets from FAFSA? Absolutely. I worked a few years after high school, and so when I went to go back, my previous years income was too high to qualify me for aid. I decided screw the system.

I made it thru my B.S. degree in computer science working enough to pay tuition. No grants, no loans.
I made about $1100 / month bartending weekend nights in a small town. I made even more when I took on an internship in my field. I went to every class, regardless of relevance because I worked to pay for that hour of instruction.

I started college with less than $5,000 in the bank, and by the end of my 3rd year was contributing $5000 to an IRA and had enough left over to play stocks and flip some cars and motorcycles.

Mister Fancypants

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I work in higher ed, indirectly with financial aid awarding, and you probably need professional advice on this.  You are right to want to keep the assets out of kids names for fafsa reporting purposes... Any student assets are viewed as fair game and the theory is those should be used to cover college costs... So if they have assets in their name, they will get little to no aid until those are exhausted.
I would talk with a professional who has some experience with both fafsa and trusts... But usually professionals who are well versed in one area know little about the other  : (

My lawyer who did our estate planning is not going to be well versed in FAFSA. He doe shave someone he calls another lawyer for more complicated financials when he has questions. I know he called on the spot regarding my in-laws estate plan and theirs is borderline on the need for complex sheltering etc...

I will probably have to get in touch with the other lawyer at a minimum and combine that resource with a FAFSA expert.

So who is a FAFSA expert?

Mister Fancypants

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I am interested in this thread as well. 

I went to school to become a lawyer hoping to work as an estate planner.  I instead became a tax litigator.  I know enough to be curious about an answer to how to best pay for kids' college, but not enough to help provide advice.  If I knew, I probably would not give out tailored advice over the internet. 

My recommendation is to find a really good estate planner in your local area, and set up a meeting to get help setting up trusts/accounts with the benefits you need.

Our estate planning lawyer is probably a little out of his league with this, he has a colleague he calls with more complex financials, but I am unsure if FAFSA planning falls into that domain.

sandandsun

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Fafsa expert? Well, I'd be careful there... Many who claim to be (college planners/other for pay folks) will be happy to give you advice, but I'm not sure I'd trust it...
What I did: sat down with our financial aid director for about 45 minutes and worked through scenarios specific to my two kids/ages/assets... If you have any connections with a local (better yet, local selective) college where you can get that kind of one on one with someone who has decent experience, would be worth your time.  Tip: avoid times of the year that coincide with the start of a new term (month before or after).  They will be too busy to see you and/or resent speniding time on that.  Many schools offer fin aid workshops throughout the school year often evening more relaxed)... Check w your local high school to see if hey have anything set up with college personnel coming in (NOT the. HS counselors giving a workshop).
And I would ask in generalities, not specific sums.  Fin aid professionals are in the business of helping kids who can't afford to attend, not those who can afford but want to game the system ; )

Mister Fancypants

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Fafsa expert? Well, I'd be careful there... Many who claim to be (college planners/other for pay folks) will be happy to give you advice, but I'm not sure I'd trust it...
What I did: sat down with our financial aid director for about 45 minutes and worked through scenarios specific to my two kids/ages/assets... If you have any connections with a local (better yet, local selective) college where you can get that kind of one on one with someone who has decent experience, would be worth your time.  Tip: avoid times of the year that coincide with the start of a new term (month before or after).  They will be too busy to see you and/or resent speniding time on that.  Many schools offer fin aid workshops throughout the school year often evening more relaxed)... Check w your local high school to see if hey have anything set up with college personnel coming in (NOT the. HS counselors giving a workshop).
And I would ask in generalities, not specific sums.  Fin aid professionals are in the business of helping kids who can't afford to attend, not those who can afford but want to game the system ; )

We have no connections into academia particularly selective schools, at least not in the Fin Aid departments, plenty of alums.

I was somewhat afraid of that, I have never really done much planning toward college savings yet only towards FI, mortgage elimination, retirement planning. This is a new world for me. It is much more complicated than I anticipated.

I have a lot of learning to do.


sandandsun

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I'd start with a fafsa instruction publication, go line by line and really read the instructions... But there is going to be some interpretation (think, doing your own complicated tax return) and that's where an expert will come in... But start there and you will really be able to narrow down your questions- and then that's when I'd try to find an expert...

Cyrano

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Yes, you want the kids' assets in a place FAFSA doesn't see them. If you're still concerned about this when the kids are 9 or 10, you could look at buying a 7-pay whole life insurance policy to deplete the children's assets by the time they are 16. They can cash it back out or keep it after college. With an honest insurance agent, the transaction costs would run about 10%. Still a lousy investment on its own merits, but cheaper than college.

As for your own assets, if you're already FI, you might simply decide to stop earning (much) income, and put a moratorium on selling assets for capital gains, during the FAFSA years. As the FAFSA regs currently stand, if you can file 1040A with less than 50,000 in annual income, your assets don't matter for FAFSA. They still matter for Profile, but some of the Ivy schools have their own institutional guidelines that kick in at certain income thresholds.

Mister Fancypants

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Yes, you want the kids' assets in a place FAFSA doesn't see them. If you're still concerned about this when the kids are 9 or 10, you could look at buying a 7-pay whole life insurance policy to deplete the children's assets by the time they are 16. They can cash it back out or keep it after college. With an honest insurance agent, the transaction costs would run about 10%. Still a lousy investment on its own merits, but cheaper than college.

As for your own assets, if you're already FI, you might simply decide to stop earning (much) income, and put a moratorium on selling assets for capital gains, during the FAFSA years. As the FAFSA regs currently stand, if you can file 1040A with less than 50,000 in annual income, your assets don't matter for FAFSA. They still matter for Profile, but some of the Ivy schools have their own institutional guidelines that kick in at certain income thresholds.

I would never buy a whole life policy with children's money, it is a poor investment and the returns would never be made up.

It would be more cost effective to keep the assets in the kids name and pay cash for college then give up investment returns for a whole life policy.

As far my income I might take $0 income during the FAFSA years and live off the cash out of a HELOC or minimal cap gains income. My high income days will be behind me.

My assets will still come into play in profile schools.

chesebert

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Why do you need FAFSA in the first place if you have enough to fully fund the costs and expenses? I have been putting $800 a month in 529 since birth and will continue to fund until college age, which should be enough to fully fund cost. I expect my kid to work during school and during summer months to help fund graduate school or retirement account.

If my kid somehow gets merit scholarships, then whatever money not used from the 529 will go straight into the kid's FIRE fund :)
« Last Edit: August 20, 2014, 10:55:39 PM by chesebert »

Mister Fancypants

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Why do you need FAFSA in the first place if you have enough to fully fund the costs and expenses? I have been putting $800 a month in 529 since birth and will continue to fund until college age, which should be enough to fully fund cost. I expect my kid to work during school and during summer months to help fund graduate school or retirement account.

If my kid somehow gets merit scholarships, then whatever money not used from the 529 will go straight into the kid's FIRE fund :)

I can afford a Ferrari and a Tesla too should I run to the dealership now? Of course not if afforded something was the only criteria for paying for it we would all be on the hedonic treadmill indefinitely.

If my children make a $60k a year Ivy but need based aid is available which can make it $30k why wouldn't I learn how to structure my assets now to get that deal?

Your advice is equivalent to putting bonds in a tax advantaged account first to avoid the taxes, so what if the dividends are taxed it's the same return.

My children's assets are looked at less favorable than mine so sheltering them makes sense.

Also to each there own I'm glad you want your children to fund their own education, I want fund my childrens. 

seattlecyclone

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Have you seen this document that explains exactly how the EFC is calculated on the FAFSA? Might be worth a read. Take a look at pages 4-6, which explain which circumstances might cause the "simplified EFC formula" or "automatic zero EFC calculation" to come into play.

In a nutshell, if you arrange your affairs such that you're allowed to file your taxes on form 1040A from the year before your kids go to college until they're done with school, and your AGI is between $24k and $50k, you qualify for the "simplified formula" that completely ignores assets. If you file on form 1040A and your AGI is below $24k, your kid will get an EFC of $0.

Qualifying for the 1040A might be a bit difficult for some early retired Mustachians, though. Dividends and IRA/401(k) distributions are fine, but capital gains and losses push you into 1040 land. Also, any contributions to or distributions from an HSA require filing form 8889, which also disqualifies you from filing form 1040A.
« Last Edit: August 21, 2014, 11:25:49 AM by seattlecyclone »

MooseOutFront

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I'm tagging along here.  My old man gifted stock to each of my kids when they were born, but it's unfortunately in their name and he adds to it each year.  Maybe at some point we do something different, but I need to know some pretty good reasons before I start getting very particular with how I want their gifts to be received. :)

Mister Fancypants

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Have you seen this document that explains exactly how the EFC is calculated on the FAFSA? Might be worth a read. Take a look at pages 4-6, which explain which circumstances might cause the "simplified EFC formula" or "automatic zero EFC calculation" to come into play.

In a nutshell, if you arrange your affairs such that you're allowed to file your taxes on form 1040A from the year before your kids go to college until they're done with school, and your AGI is between $24k and $50k, you qualify for the "simplified formula" that completely ignores assets. If you file on form 1040A and your AGI is below $24k, your kid will get an EFC of $0.

Qualifying for the 1040A might be a bit difficult for some early retired Mustachians, though. Dividends and IRA/401(k) distributions are fine, but capital gains and losses push you into 1040 land. Also, any contributions to or distributions from an HSA require filing form 8889, which also disqualifies you from filing form 1040A.

Thank you for the link... Awesome homework assignment for the weekend :)

HSA's won't impact me, we don't have them nor do I anticipate getting one. Capital gains/losses may or may not be an issue, can't predict the market... when you need to adjust a holding you have to pull the trigger, so that one might suck, but can probably stay below $50k in actual income.

I can probably avoid IRA distributions, for the college years, we will be younger then RMD's and plan on using a HELOC's proceeds for living expenses if possible, a no income situation for the few years to preserve wealth and minimize income.


Mister Fancypants

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I'm tagging along here.  My old man gifted stock to each of my kids when they were born, but it's unfortunately in their name and he adds to it each year.  Maybe at some point we do something different, but I need to know some pretty good reasons before I start getting very particular with how I want their gifts to be received. :)

Your kids will be responsible for contributing 20% to 25% of their taxable assets annually to their college costs.

Good enough reason to not have assets in their name?

seattlecyclone

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HSA's won't impact me, we don't have them nor do I anticipate getting one. Capital gains/losses may or may not be an issue, can't predict the market... when you need to adjust a holding you have to pull the trigger, so that one might suck, but can probably stay below $50k in actual income.

Do you have (or plan to have) enough of your portfolio in tax-sheltered retirement accounts that you could plan to do all of any necessary rebalancing only within those accounts while your children are in college? The normal advice is to put tax-efficient investments (stock funds, especially foreign ones) in the taxable accounts and tax-inefficient investments (bond funds, REITs) in the retirement accounts. However for this purpose you may want to mix and match a bit more. Put enough of each asset class in the retirement accounts so that you can do some meaningful rebalancing in there if you feel the need. Selling even one share from taxable accounts while your kids are in college could drastically reduce their financial aid for the next year, so tax-inefficient investing might pay off during that period of your life.

Mister Fancypants

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HSA's won't impact me, we don't have them nor do I anticipate getting one. Capital gains/losses may or may not be an issue, can't predict the market... when you need to adjust a holding you have to pull the trigger, so that one might suck, but can probably stay below $50k in actual income.

Do you have (or plan to have) enough of your portfolio in tax-sheltered retirement accounts that you could plan to do all of any necessary rebalancing only within those accounts while your children are in college? The normal advice is to put tax-efficient investments (stock funds, especially foreign ones) in the taxable accounts and tax-inefficient investments (bond funds, REITs) in the retirement accounts. However for this purpose you may want to mix and match a bit more. Put enough of each asset class in the retirement accounts so that you can do some meaningful rebalancing in there if you feel the need. Selling even one share from taxable accounts while your kids are in college could drastically reduce their financial aid for the next year, so tax-inefficient investing might pay off during that period of your life.

Portfolio structure is slightly more complicated than that unfortunately. All retirement accounts are using index funds and set up to tax efficiently, however we have some taxable assets which are "very old" and we hope to not have to deal with inherited taxable assets but there is a strong possibility due to the time frame that we will so I can't predict with any certainty that far out if capital gains situation might arise that will need to be addressed.

Hoping all of the taxable accounts can be addressed accordingly before the college years...

Bob W

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Do you want to hide those assets from FAFSA? Absolutely. I worked a few years after high school, and so when I went to go back, my previous years income was too high to qualify me for aid. I decided screw the system.

I made it thru my B.S. degree in computer science working enough to pay tuition. No grants, no loans.
I made about $1100 / month bartending weekend nights in a small town. I made even more when I took on an internship in my field. I went to every class, regardless of relevance because I worked to pay for that hour of instruction.

I started college with less than $5,000 in the bank, and by the end of my 3rd year was contributing $5000 to an IRA and had enough left over to play stocks and flip some cars and motorcycles.

I'm liking this! 

 If your children have 250K at age 18 they are doing very well.  Asking them to work their way through college would be a fine idea IMO.  I believe MMM did this?

 Even working partially would help.  The idea here is to build a strong understanding of money.   If they don't touch the 250 and earn their way through,  by age 25 they'll have 500K and a pretty good respect for money,  work and school.  They will probably have very good paying jobs or businesses of their own at that point and retirement by age 35 would be a no brainer.   

You might also want to check on the outcomes of an "Ivy" vs. State University education.   From what I have heard the lifetimes earning and pay differential is minimal, if any,  for similar degrees.   So if you're paying 3 times as much for something it might be nice if there is a benefit to the extra cost. 

Congrats of being having the forethought and resources to do this sort of planning!

Mister Fancypants

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I'm liking this! 

 If your children have 250K at age 18 they are doing very well.  Asking them to work their way through college would be a fine idea IMO.  I believe MMM did this?

 Even working partially would help.  The idea here is to build a strong understanding of money. 

They will not have earned the money, however we feel they are entitled to it, if you read my original post the $250k will be the impact of compounded investments on an insurance policy they are beneficiaries to in care of my wife.

As a separate matter I also stated both my wife and I had our educations paid for and think this was the best gift our parents every gave us, and intend to provide the same to our children.

I don't look at the two topics as the same, they will have $250k and we will pay for their education. As far as teaching them the value of money, how to invest it how to be frugal those lessons will be taught in there own right, and both the investment accounts and college funding can be used as tools to help with those lessons along the way.

If they don't touch the 250 and earn their way through,  by age 25 they'll have 500K and a pretty good respect for money,  work and school.  They will probably have very good paying jobs or businesses of their own at that point and retirement by age 35 would be a no brainer.   

The goal is they shouldn't touch it and it should continue to grow to at least $400k by graduation, and over $500k by the time they would complete grad school if they choose to attend. The point of this topic is looking to the right vehicle to contain these investments so it doesn't muddy the FAFSA situation down the road. Some form of Trust is going to be the answer which will give us more control of their access and use especially until we determine they do understand the value of money.

You might also want to check on the outcomes of an "Ivy" vs. State University education.   From what I have heard the lifetimes earning and pay differential is minimal, if any,  for similar degrees.   So if you're paying 3 times as much for something it might be nice if there is a benefit to the extra cost. 

Congrats of being having the forethought and resources to do this sort of planning!

My wife and I are the product of state schools, we do have Ivy's in the family (wife's PhD too), I am planning for the "what if's" I would rather be prepared and have too much then not be prepared and have to figure it out later.

Thanks, no one ever accused me of under planning. :) We consider ourselves very fortune to be able to plan for our children in this way.

From a practical standpoint we are FI, I only work to pay for out mortgage and fund my children's education. I could downsize my house and relocate to a cheaper COL part of the country and shift our assets now and never work again.

We love our house and education is important to us so I continue to work to support those goals. 

Mister Fancypants

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Have you seen this document that explains exactly how the EFC is calculated on the FAFSA? Might be worth a read. Take a look at pages 4-6, which explain which circumstances might cause the "simplified EFC formula" or "automatic zero EFC calculation" to come into play.

In a nutshell, if you arrange your affairs such that you're allowed to file your taxes on form 1040A from the year before your kids go to college until they're done with school, and your AGI is between $24k and $50k, you qualify for the "simplified formula" that completely ignores assets. If you file on form 1040A and your AGI is below $24k, your kid will get an EFC of $0.

Qualifying for the 1040A might be a bit difficult for some early retired Mustachians, though. Dividends and IRA/401(k) distributions are fine, but capital gains and losses push you into 1040 land. Also, any contributions to or distributions from an HSA require filing form 8889, which also disqualifies you from filing form 1040A.

So I started reading the document and decided the first step was to go to the IRS website and see what the requirements are for 1040A... I'm dead in the water... We will always be itemizing, my property taxes alone put me above the standard deduction for Married Filing Jointly.

Gotta love NYS property taxes. :P

Going to keep reading, no simple calculation for me :(

beltim

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How do you feel about the ethics of elaborate restructuring of your finances in order to get a larger financial aid package?

Mister Fancypants

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How do you feel about the ethics of elaborate restructuring of your finances in order to get a larger financial aid package?

I'll bite... what exactly did you have in mind...

beltim

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How do you feel about the ethics of elaborate restructuring of your finances in order to get a larger financial aid package?

I'll bite... what exactly did you have in mind...

I'm genuinely curious.  It seems as if one of the purposes of this thread is to minimize your income in order to qualify for the maximum financial aid via FAFSA.  Say you were to, through some non-obvious means, do so and your kids receive a sizable financial aid package, that they don't need.  Do you think that's ethical?

Worsted Skeins

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One other thing to consider:  the Ivies and other competitive schools do not use the FAFSA for financial aid but the CSS Profile.  Your retirement accounts, for example, are not listed on FAFSA but are included on the Profile. FAFSA is still required if your students want Stafford loans.  Not that your children will need them...




Mister Fancypants

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How do you feel about the ethics of elaborate restructuring of your finances in order to get a larger financial aid package?

I'll bite... what exactly did you have in mind...

I'm genuinely curious.  It seems as if one of the purposes of this thread is to minimize your income in order to qualify for the maximum financial aid via FAFSA.  Say you were to, through some non-obvious means, do so and your kids receive a sizable financial aid package, that they don't need.  Do you think that's ethical?

If that's how it appears that is not quite the case. I am looking to optimize my income/assets situation to get the most bang for my buck.

I put my least tax efficient investments in my most tax advantaged accounts to avoid paying a higher tax bill to the IRS by following their rule I don't find that to be unethical.

So if having my children own assets directly would exclude them from being eligible any financial aid, but I can structure it in some form of Trust that might not create that situation, that is created by the FAFSA rules that too is just following the rules and guidelines set for me.

In the end, if after all the financial engineering is done it is determined the bill is still $x, I will pay $x, but I will make every effort to minimize it without doing anything illegal.

In general those with the most resources have the most options, so is that completely fair that I can plan better maybe not, but by no means is it unethical to take advantaged of the rules laid out for you.

I don't make the rules...

Mister Fancypants

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One other thing to consider:  the Ivies and other competitive schools do not use the FAFSA for financial aid but the CSS Profile.  Your retirement accounts, for example, are not listed on FAFSA but are included on the Profile. FAFSA is still required if your students want Stafford loans.  Not that your children will need them...

That is good to know... That makes a huge difference, how do they look at retirement accounts?

Institutional aid is real goal, the Stafford loans are not what is relevant.

Simple Abundant Living

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Why do you need FAFSA in the first place if you have enough to fully fund the costs and expenses? I have been putting $800 a month in 529 since birth and will continue to fund until college age, which should be enough to fully fund cost. I expect my kid to work during school and during summer months to help fund graduate school or retirement account.

If my kid somehow gets merit scholarships, then whatever money not used from the 529 will go straight into the kid's FIRE fund :)

I've got to agree with this.  Are your children then ones society (tax payers) should help get an education?  Probably not in my opinion.  Are you going to file for food stamps and welfare when your income drops in ER?  How would you feel if other (millionaires) did the same thing?

seattlecyclone

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Have you seen this document that explains exactly how the EFC is calculated on the FAFSA? Might be worth a read. Take a look at pages 4-6, which explain which circumstances might cause the "simplified EFC formula" or "automatic zero EFC calculation" to come into play.

In a nutshell, if you arrange your affairs such that you're allowed to file your taxes on form 1040A from the year before your kids go to college until they're done with school, and your AGI is between $24k and $50k, you qualify for the "simplified formula" that completely ignores assets. If you file on form 1040A and your AGI is below $24k, your kid will get an EFC of $0.

Qualifying for the 1040A might be a bit difficult for some early retired Mustachians, though. Dividends and IRA/401(k) distributions are fine, but capital gains and losses push you into 1040 land. Also, any contributions to or distributions from an HSA require filing form 8889, which also disqualifies you from filing form 1040A.

So I started reading the document and decided the first step was to go to the IRS website and see what the requirements are for 1040A... I'm dead in the water... We will always be itemizing, my property taxes alone put me above the standard deduction for Married Filing Jointly.

Gotta love NYS property taxes. :P

Going to keep reading, no simple calculation for me :(

Don't dismiss it so fast. If your AGI will be under $50k anyway, the amount of money you will save from itemizing will be minimal. The standard deduction for a married couple plus four exemptions is $28k this year. So you're only going to owe federal income tax on a maximum of $22k of taxable income even if you don't itemize. That money will be taxed in the 10-15% bracket under current law, unless the income comes from qualified dividends in which case it will be untaxed. Itemizing might save you a few hundred dollars on your taxes, but if that's the only thing keeping you from omitting your assets on the FAFSA it could be a worthwhile trade.

That said, many of the elite schools you seem to be steering your kids toward don't use the FAFSA anyway, so you should look into a number of strategies to cover all of your bases.

Mister Fancypants

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Have you seen this document that explains exactly how the EFC is calculated on the FAFSA? Might be worth a read. Take a look at pages 4-6, which explain which circumstances might cause the "simplified EFC formula" or "automatic zero EFC calculation" to come into play.

In a nutshell, if you arrange your affairs such that you're allowed to file your taxes on form 1040A from the year before your kids go to college until they're done with school, and your AGI is between $24k and $50k, you qualify for the "simplified formula" that completely ignores assets. If you file on form 1040A and your AGI is below $24k, your kid will get an EFC of $0.

Qualifying for the 1040A might be a bit difficult for some early retired Mustachians, though. Dividends and IRA/401(k) distributions are fine, but capital gains and losses push you into 1040 land. Also, any contributions to or distributions from an HSA require filing form 8889, which also disqualifies you from filing form 1040A.

So I started reading the document and decided the first step was to go to the IRS website and see what the requirements are for 1040A... I'm dead in the water... We will always be itemizing, my property taxes alone put me above the standard deduction for Married Filing Jointly.

Gotta love NYS property taxes. :P

Going to keep reading, no simple calculation for me :(

Don't dismiss it so fast. If your AGI will be under $50k anyway, the amount of money you will save from itemizing will be minimal. The standard deduction for a married couple plus four exemptions is $28k this year. So you're only going to owe federal income tax on a maximum of $22k of taxable income even if you don't itemize. That money will be taxed in the 10-15% bracket under current law, unless the income comes from qualified dividends in which case it will be untaxed. Itemizing might save you a few hundred dollars on your taxes, but if that's the only thing keeping you from omitting your assets on the FAFSA it could be a worthwhile trade.

That said, many of the elite schools you seem to be steering your kids toward don't use the FAFSA anyway, so you should look into a number of strategies to cover all of your bases.

I didn't even think about the fact that at the low level of income the itemization is not worth so much, I itemize now as I have mortgage interest, and state taxes as well it makes a big difference. At sub $50k your right.

As far as Profile vs FAFSA not even sure what that actual entails or what strategies to employ on that front. 

I never did Profile, me I was a state school attendee myself :)

At this point no steering involved, preparing for all possibilities.

Any suggestions on Profile strategies?

Mister Fancypants

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Why do you need FAFSA in the first place if you have enough to fully fund the costs and expenses? I have been putting $800 a month in 529 since birth and will continue to fund until college age, which should be enough to fully fund cost. I expect my kid to work during school and during summer months to help fund graduate school or retirement account.

If my kid somehow gets merit scholarships, then whatever money not used from the 529 will go straight into the kid's FIRE fund :)

I've got to agree with this.  Are your children then ones society (tax payers) should help get an education?  Probably not in my opinion.  Are you going to file for food stamps and welfare when your income drops in ER?  How would you feel if other (millionaires) did the same thing?

I will have no need for food stamps, or welfare, not really looking at tax payer aid, but institutional aid.

If you think the very wealthy are not trying to come up with ways to avoid paying large bills I think you need to look at our society again.

And as far as my children's FIRE fund, this entire post is centered on how to shelter there assets so they are not obligated to pay for school themselves. Not that I wouldn't be paying. They will pretty much be FIRE upon college graduation, but we plan on teaching them they need to go out in the world and make there own way, just like we did.

beltim

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How do you feel about the ethics of elaborate restructuring of your finances in order to get a larger financial aid package?

I'll bite... what exactly did you have in mind...

I'm genuinely curious.  It seems as if one of the purposes of this thread is to minimize your income in order to qualify for the maximum financial aid via FAFSA.  Say you were to, through some non-obvious means, do so and your kids receive a sizable financial aid package, that they don't need.  Do you think that's ethical?

If that's how it appears that is not quite the case. I am looking to optimize my income/assets situation to get the most bang for my buck.

I put my least tax efficient investments in my most tax advantaged accounts to avoid paying a higher tax bill to the IRS by following their rule I don't find that to be unethical.

So if having my children own assets directly would exclude them from being eligible any financial aid, but I can structure it in some form of Trust that might not create that situation, that is created by the FAFSA rules that too is just following the rules and guidelines set for me.

In the end, if after all the financial engineering is done it is determined the bill is still $x, I will pay $x, but I will make every effort to minimize it without doing anything illegal.

In general those with the most resources have the most options, so is that completely fair that I can plan better maybe not, but by no means is it unethical to take advantaged of the rules laid out for you.

I don't make the rules...

Legality is not a basis for morality.  That said, your other replies show that you consider taking institutional aid money ethical in this situation, so that answers that question.

beltim

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My guess is that this is a specialized enough case, with a high enough potential payoff, that your best strategy would be talking to a CPA, preferably one who specializes in high net worth individuals.

Mister Fancypants

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How do you feel about the ethics of elaborate restructuring of your finances in order to get a larger financial aid package?

I'll bite... what exactly did you have in mind...

I'm genuinely curious.  It seems as if one of the purposes of this thread is to minimize your income in order to qualify for the maximum financial aid via FAFSA.  Say you were to, through some non-obvious means, do so and your kids receive a sizable financial aid package, that they don't need.  Do you think that's ethical?

If that's how it appears that is not quite the case. I am looking to optimize my income/assets situation to get the most bang for my buck.

I put my least tax efficient investments in my most tax advantaged accounts to avoid paying a higher tax bill to the IRS by following their rule I don't find that to be unethical.

So if having my children own assets directly would exclude them from being eligible any financial aid, but I can structure it in some form of Trust that might not create that situation, that is created by the FAFSA rules that too is just following the rules and guidelines set for me.

In the end, if after all the financial engineering is done it is determined the bill is still $x, I will pay $x, but I will make every effort to minimize it without doing anything illegal.

In general those with the most resources have the most options, so is that completely fair that I can plan better maybe not, but by no means is it unethical to take advantaged of the rules laid out for you.

I don't make the rules...

Legality is not a basis for morality.  That said, your other replies show that you consider taking institutional aid money ethical in this situation, so that answers that question.

If a school a school thinks its ethical to charge $60k per year than crest some formula that would allow me to only pay $30k and have the rest cover by institutional aid, yes I think the ethics line up.

And if the actually journal it out against an endowment vs just writing it off, I'm fine their too.

Emilyngh

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The max one can get in grants from the feds through the FAFSA is the max Pell grant, which is currently $5,550.   And to get that full amount one must have a very low income ($20-$30kish for family of 3 IIRC).   If you think your income will be close to low enough and want to maximize the chances, go through the FAFSA instructions.  But, the idea that one can get a free ride, or even significant discount, from the feds is just not true (unless attending CC and living at home).

Where students get the big aid is directly from schools themselves, and thus, usually it's the richer schools that will give more need-based aid.  It's completely up to the school what criteria to use (although many do use the Profile).   The schools that give the most money are pretty aware of loopholes and it's very hard to hide assets from them without committing fraud.   You can buy annuities, or give this money away to a relative, but IMO, these are pretty stupid ideas (might not even work) and it's better off to just try do the basic like putting in a 529 where only 5.6 percent of the money will count against aid, or keeping money in retirement accounts and using after college to pay off loans the kids get.   The money in a 529 and/or retirement accounts will both be reported and count against aid, but will count less than money sitting in an account in the kid's name.

msilenus

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Emilyngh,

I was playing around with Harvard's financial aid calculator, and it looked like for someone able to stick most of their assets in retirement accounts and home equity, it could be cheaper than a public school.  Then I saw somewhere that they really do want to see your retirement account balances, but don't use them for the calculations, but do rely on them for getting some kind of "better picture" of what's going on.  Basically, I read that to mean that they use FAFSA for a sort of baseline computation, but are ready to toss it out if they see parents... well... like me.

Sounds like you've got some real expertise here.  Can you confirm if that's what's going on, and/or if that's typical of private schools?

I'm curious because if I'm wrong about those implications, then private schools could easily be cheaper than public schools for the careful Mustachian who draws down taxable before Freshman year.

Worsted Skeins

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One other thing to consider:  the Ivies and other competitive schools do not use the FAFSA for financial aid but the CSS Profile.  Your retirement accounts, for example, are not listed on FAFSA but are included on the Profile. FAFSA is still required if your students want Stafford loans.  Not that your children will need them...

That is good to know... That makes a huge difference, how do they look at retirement accounts?

Institutional aid is real goal, the Stafford loans are not what is relevant.

An article that might give you some insight:

http://www.forbes.com/sites/troyonink/2014/02/14/how-assets-hurt-college-aid-eligibility-on-fafsa-and-css-profile/

I want to mention that rental properties are addressed in the article, rentals being a popular Mustachian investment.

Our college savings strategies included our Roths, knowing that other retirement accounts were funded adequately. As it turned out, we never dipped into our Roths due to the generous institutional merit aid that my son received.

Part of the problem in strategizing college savings is that the rules of the game are in flux.  For example, when my son was about to apply to colleges, a number of schools changed their AP policies, limiting the number of credits they would give or raising the scores for credits.  Some colleges formerly gave merit aid but now only give financial aid.  It is true that Harvard is generous with aid even for the fairly well heeled--which only adds to the admission pool making the chance that your kid is getting in even lower.

Further, some colleges have supplemental forms beyond FAFSA or the Profile.  Their in house equations for aid are not clear.

There are many myths perpetuated on aid--one being that "My kids will never qualify so why bother". One friend says that is the biggest mistake they made. Her son attended an inexpensive state school but even merit scholarships there required FAFSA--so her son missed out his first year.  It was not a lot of money but even a thousand dollars will pay for books.

To be honest, earning a degree in a timely fashion (four years over five or six) might be the best way to trim the cost of college.  Few of my son's peers have done this.  We only know one person who went the route of community college and was able to finish a four year degree in two years at uni.  At a dinner event we attended last night one of my husband's colleagues said that his daughter accumulated lots of credits in two years at the CC but it only trimmed one year off her university program which has a specific course of study.

Mister Fancypants

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Emilyngh,

I was playing around with Harvard's financial aid calculator, and it looked like for someone able to stick most of their assets in retirement accounts and home equity, it could be cheaper than a public school.  Then I saw somewhere that they really do want to see your retirement account balances, but don't use them for the calculations, but do rely on them for getting some kind of "better picture" of what's going on.  Basically, I read that to mean that they use FAFSA for a sort of baseline computation, but are ready to toss it out if they see parents... well... like me.

Sounds like you've got some real expertise here.  Can you confirm if that's what's going on, and/or if that's typical of private schools?

I'm curious because if I'm wrong about those implications, then private schools could easily be cheaper than public schools for the careful Mustachian who draws down taxable before Freshman year.

Agreed, Harvard and Princeton and their elk actually become a lot cheaper when your assets are structured properly. What I am looking to is make sure not to make blatant mistakes years in advance to screw those types of calcs up.

Mister Fancypants

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One other thing to consider:  the Ivies and other competitive schools do not use the FAFSA for financial aid but the CSS Profile.  Your retirement accounts, for example, are not listed on FAFSA but are included on the Profile. FAFSA is still required if your students want Stafford loans.  Not that your children will need them...

That is good to know... That makes a huge difference, how do they look at retirement accounts?

Institutional aid is real goal, the Stafford loans are not what is relevant.

An article that might give you some insight:

http://www.forbes.com/sites/troyonink/2014/02/14/how-assets-hurt-college-aid-eligibility-on-fafsa-and-css-profile/

I want to mention that rental properties are addressed in the article, rentals being a popular Mustachian investment.

Our college savings strategies included our Roths, knowing that other retirement accounts were funded adequately. As it turned out, we never dipped into our Roths due to the generous institutional merit aid that my son received.

Part of the problem in strategizing college savings is that the rules of the game are in flux.  For example, when my son was about to apply to colleges, a number of schools changed their AP policies, limiting the number of credits they would give or raising the scores for credits.  Some colleges formerly gave merit aid but now only give financial aid.  It is true that Harvard is generous with aid even for the fairly well heeled--which only adds to the admission pool making the chance that your kid is getting in even lower.

Further, some colleges have supplemental forms beyond FAFSA or the Profile.  Their in house equations for aid are not clear.

There are many myths perpetuated on aid--one being that "My kids will never qualify so why bother". One friend says that is the biggest mistake they made. Her son attended an inexpensive state school but even merit scholarships there required FAFSA--so her son missed out his first year.  It was not a lot of money but even a thousand dollars will pay for books.

To be honest, earning a degree in a timely fashion (four years over five or six) might be the best way to trim the cost of college.  Few of my son's peers have done this.  We only know one person who went the route of community college and was able to finish a four year degree in two years at uni.  At a dinner event we attended last night one of my husband's colleagues said that his daughter accumulated lots of credits in two years at the CC but it only trimmed one year off her university program which has a specific course of study.

I've actually read a lot of Troy's material on Forbes and was actually considering reaching out to his company Stratagee.com although it seems more geared towards those at the application phase not he funding point.

Regardless for a $350 consult it might worth it, he is well written and has a lot of useful insight.

I'm going to review the FAFSA forms, and speak with my estate attorney and CPA first.

Emilyngh

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Emilyngh,

I was playing around with Harvard's financial aid calculator, and it looked like for someone able to stick most of their assets in retirement accounts and home equity, it could be cheaper than a public school.  Then I saw somewhere that they really do want to see your retirement account balances, but don't use them for the calculations, but do rely on them for getting some kind of "better picture" of what's going on.  Basically, I read that to mean that they use FAFSA for a sort of baseline computation, but are ready to toss it out if they see parents... well... like me.

Sounds like you've got some real expertise here.  Can you confirm if that's what's going on, and/or if that's typical of private schools?

I'm curious because if I'm wrong about those implications, then private schools could easily be cheaper than public schools for the careful Mustachian who draws down taxable before Freshman year.

I am no expert, but have looked into it some.

My understanding is that schools with large endowments (eg, wealthy schools, usually hard to get into) have much  more financial aid available than less wealthy schools, and thus if they determine you're needy can wind up costing less (possibly much less) than easier to get into publics.    It is also my understanding that the type of money we usually talk about here (say less than a million) in a retirement account, probably won't be very counted against you.   It should be reported and will be counted, but probably won't hurt financial aid much, b/c it's assumed that this is needed for retirement.   But, all of this is up to the school.

Joel

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If your kids will have 250k each at age 18, they shouldn't be receiving any financial aid...

ltt

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If your kids will have 250k each at age 18, they shouldn't be receiving any financial aid...

I agree with this wholeheartedly.

TomTX

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If your kids will have 250k each at age 18, they shouldn't be receiving any financial aid...

I agree with this wholeheartedly.

Yep.

davo

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I am a CPA who works for a State College Savings Plan. I do not think a CPA would be able to help you with a financial aid strategy, it's just not really an accounting or tax thing. Maybe a consultant or a trusted high net worth financial advisor.

I did find an article about how much money in non-retirement assets you can have without reducing FAFSA.

http://www.cbsnews.com/news/will-saving-for-college-hurt-financial-aid-chances/#ixzz1Y1UjXFQm

One final note: Most of the Ivy League schools give plenty of merit based scholarships to reduce the "sticker price." I  think the "sticker price" is only for students who have money AND barely qualified for enrollment. Harvard has a net price estimator on their site.
 
 http://www.harvard.edu/harvard-glance "UNDERGRADUATE COST AND FINANCIAL AID Families with students on scholarship pay an average of $11,500 annually toward the cost of a Harvard education. More than 65 percent of Harvard College students receive scholarship aid, and the average grant this year is $46,000.  "
 
 

randomstring

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People keep posting about merit scholarships at the ivies. Is this a recent thing?

I went to one of the ivies 10+ years ago, and the financial aid was strictly need based. Moreover, I had some outside merit scholarships (not much, but a few grand a semester); these proved to be of no value to me, since my need based aid was strictly reduced by the amount of these scholarships. The need based aid was structured in such a way that I still ended up with loans (but subsidized only), and it had assumed at least 20 hours a week of work study work. It was by no means a hand out.

So.. long story short -- I think it is an excellent idea to structure your finances in such way that your kids will qualify for at least some need based tuition abatement. The ivies have huge endowments; they are not hurting for money and your kid will not be depriving some other kid of much needed aid.

TomTX

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People keep posting about merit scholarships at the ivies. Is this a recent thing?

I went to one of the ivies 10+ years ago, and the financial aid was strictly need based. Moreover, I had some outside merit scholarships (not much, but a few grand a semester); these proved to be of no value to me, since my need based aid was strictly reduced by the amount of these scholarships. The need based aid was structured in such a way that I still ended up with loans (but subsidized only), and it had assumed at least 20 hours a week of work study work. It was by no means a hand out.

My wife was stuck in mandated on-campus work study if she wanted loans - when she could have made 50% more per hour off-campus. More like indenture than a handout.

Mister Fancypants

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I am a CPA who works for a State College Savings Plan. I do not think a CPA would be able to help you with a financial aid strategy, it's just not really an accounting or tax thing. Maybe a consultant or a trusted high net worth financial advisor.

I did find an article about how much money in non-retirement assets you can have without reducing FAFSA.

http://www.cbsnews.com/news/will-saving-for-college-hurt-financial-aid-chances/#ixzz1Y1UjXFQm

One final note: Most of the Ivy League schools give plenty of merit based scholarships to reduce the "sticker price." I  think the "sticker price" is only for students who have money AND barely qualified for enrollment. Harvard has a net price estimator on their site.
 
 http://www.harvard.edu/harvard-glance "UNDERGRADUATE COST AND FINANCIAL AID Families with students on scholarship pay an average of $11,500 annually toward the cost of a Harvard education. More than 65 percent of Harvard College students receive scholarship aid, and the average grant this year is $46,000.  "

Great link thanks for the article!!

Worsted Skeins

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People keep posting about merit scholarships at the ivies. Is this a recent thing?


I don't think any of the Ivies give merit aid.

Among the colleges that do give merit aid, I discovered that some offer a few "free ride" scholarships while others give lesser scholarships to more students.  The government's website IPEDS was helpful to me as a parent when comparing the sticker price to the average cost of various colleges.

Scandium

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 http://www.harvard.edu/harvard-glance "UNDERGRADUATE COST AND FINANCIAL AID Families with students on scholarship pay an average of $11,500 annually toward the cost of a Harvard education. More than 65 percent of Harvard College students receive scholarship aid, and the average grant this year is $46,000.  "

That one was interesting. The parental (non-retirement) investments really made a huge difference. I tried to set that to any thing from $100k to $1M. This was with out combined income at $150K
The school cost went like this

Invested- Cost [$ 1k]
100 - 9.6
150 - 22.1
300 - 29.6
350 - 32
500   - 39.6
700   - 49.6
1000 - 62.7

At $1 million in investment you are not eligible for aid. Guess this further shows the value of stashing into a 401k rather than a taxable account!
Other notes;
Real estate equity counts the same
If you FIRE with $700k and drop your income, the lowest cost will go is still $34,600 (as long as income is below about $70k.)
Harvard assumes $4,600 from the child working

This kinda blows as I hoped to retire around the time my child goes to college, but that would require a sizable 401k AND a taxable account to last 10 years, so more than $500k