Author Topic: Structuring your kids asset while saving for college and thinking about FAFSA  (Read 18251 times)

teen persuasion

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Interesting discussion.  I'm in a different situation, low income, larger family size, little taxable savings, kids in and out of college as well as approaching.  I'll just throw out some of our experiences to date with financial aid.

Aid varies wildly from school to school, regardless of your EFC.  DD1 began college in 2008, and our EFC was effectively zero, yet her first choice college gapped her $16k.  Needless to say, she was very happy at her second choice college where we paid very little out of pocket (she did have WS and subsidized loans), despite costing $54k per year by her senior year.  She did miss out on a full ride scholarship at a state University, all because she neglected to update her SAT scores when they improved.  We only learned about the scholarship in her acceptance letter, after the deadline.  She didn't want to attend there anyway.

DS2 got a better FA offer from his second choice, and used that to get his first choice school to increase his aid; they beat the offer in an attempt to keep DS2, and he really preferred them and let them know.  Last summer, he earned enough money that it affected his aid.  He went back to FA, and managed to get some aid restored for this year (his senior year).

DD3 just returned to her state University for her second year.  I have seen how aid has changed, just in the years since DD1 began in 2008.  Some of the FAFSA charts are adjusted for inflation, but some seem to be going the opposite direction.  The threshold for the auto zero EFC dropped from $32k income per year to $23k, now $24k.  We used to make the $32k cutoff, but $24k is out of reach right now.  The chart for asset protection has dropped over the years, I couldn't believe my eyes when I compared 2008 to later year's FAFSA charts.  Certain aid programs have disappeared.  TAP seems to always be underfunded.  Student loans are slowly shifting to more unsubsidized, grace periods are disappearing. 

Loans tend to be the first aid given, and other aid is tied to accepting the loans.  When DS2 was first offered unsubsidized loans, we suggested he decline them.  He was told that he could not get his other, more favorable loans unless he also accepted the unsubsidized ones.

My larger point is that financial aid may have entirely different rules by the time your children hit college, so flexibility may be your best bet.  Watch the current rules, watch trends, diversify.  Make sure your kids are in demand to colleges, so they will be courted with merit aid.  Explore which colleges give merit vs need based aid.  Consider colleges that do not charge tuition - students are expected to work in some way.  Explore local scholarships thru the kids' school district - many small organizations go thru the HS guidance office for candidates, so you must be sure to apply for everything you might be eligible for.  We've also gotten small scholarships thru our church.

teen persuasion

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Another random thought: could some of your children's income be shielded by being shifted to Roth accounts?  If they have any earnings, even say paper route or lawn mowing, they are eligible to contribute to an IRA, even if you (the parent) actually front the money for them.  Some savvy people contribute to IRAs for their infant models, etc.

May be totally impossible, just thought I'd throw it out there, in case you have a family business.

msilenus

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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

Good news: if this is how things look to you, then it's not that you're hosed, it's just that you're not trying hard enough to avoid taxes yet.  The easy way to fix this problem is to stop sweating the 10 year gap, save much more aggressively in retirement accounts (assuming you aren't yet maxing your retirement account space), and fill the gap with some combination of SEPPs (72t distributions) or Roth a conversion ladder, and a much smaller taxable position.  Your 401k+Roth IRA (from backdoor contributions if you earn too much for regular ones) isn't off-limits before 55 --you just need to finesse it a bit. 

You can also hide assets in your home equity, which you could re-tap once the kid's out of college.

Mister Fancypants

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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.

Exactly my point, why be penny wise and pound foolish... This is group of people who deal in optimizations...

There is no harm in trying to get the best deal possible even if you don't really need it per se

Mister Fancypants

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Interesting discussion.  I'm in a different situation, low income, larger family size, little taxable savings, kids in and out of college as well as approaching.  I'll just throw out some of our experiences to date with financial aid.

Aid varies wildly from school to school, regardless of your EFC.  DD1 began college in 2008, and our EFC was effectively zero, yet her first choice college gapped her $16k.  Needless to say, she was very happy at her second choice college where we paid very little out of pocket (she did have WS and subsidized loans), despite costing $54k per year by her senior year.  She did miss out on a full ride scholarship at a state University, all because she neglected to update her SAT scores when they improved.  We only learned about the scholarship in her acceptance letter, after the deadline.  She didn't want to attend there anyway.

DS2 got a better FA offer from his second choice, and used that to get his first choice school to increase his aid; they beat the offer in an attempt to keep DS2, and he really preferred them and let them know.  Last summer, he earned enough money that it affected his aid.  He went back to FA, and managed to get some aid restored for this year (his senior year).

DD3 just returned to her state University for her second year.  I have seen how aid has changed, just in the years since DD1 began in 2008.  Some of the FAFSA charts are adjusted for inflation, but some seem to be going the opposite direction.  The threshold for the auto zero EFC dropped from $32k income per year to $23k, now $24k.  We used to make the $32k cutoff, but $24k is out of reach right now.  The chart for asset protection has dropped over the years, I couldn't believe my eyes when I compared 2008 to later year's FAFSA charts.  Certain aid programs have disappeared.  TAP seems to always be underfunded.  Student loans are slowly shifting to more unsubsidized, grace periods are disappearing. 

Loans tend to be the first aid given, and other aid is tied to accepting the loans.  When DS2 was first offered unsubsidized loans, we suggested he decline them.  He was told that he could not get his other, more favorable loans unless he also accepted the unsubsidized ones.

My larger point is that financial aid may have entirely different rules by the time your children hit college, so flexibility may be your best bet.  Watch the current rules, watch trends, diversify.  Make sure your kids are in demand to colleges, so they will be courted with merit aid.  Explore which colleges give merit vs need based aid.  Consider colleges that do not charge tuition - students are expected to work in some way.  Explore local scholarships thru the kids' school district - many small organizations go thru the HS guidance office for candidates, so you must be sure to apply for everything you might be eligible for.  We've also gotten small scholarships thru our church.

Very useful and timely information from someone in the trenches, thanks for your insight :)

Mister Fancypants

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Another random thought: could some of your children's income be shielded by being shifted to Roth accounts?  If they have any earnings, even say paper route or lawn mowing, they are eligible to contribute to an IRA, even if you (the parent) actually front the money for them.  Some savvy people contribute to IRAs for their infant models, etc.

May be totally impossible, just thought I'd throw it out there, in case you have a family business.

It insurance earnings not taxable income so no Roth is not a valid shelter, but thanks. I wish it were that easy :)

Scandium

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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

Good news: if this is how things look to you, then it's not that you're hosed, it's just that you're not trying hard enough to avoid taxes yet.  The easy way to fix this problem is to stop sweating the 10 year gap, save much more aggressively in retirement accounts (assuming you aren't yet maxing your retirement account space), and fill the gap with some combination of SEPPs (72t distributions) or Roth a conversion ladder, and a much smaller taxable position.  Your 401k+Roth IRA (from backdoor contributions if you earn too much for regular ones) isn't off-limits before 55 --you just need to finesse it a bit. 

You can also hide assets in your home equity, which you could re-tap once the kid's out of college.

Yes, I'm not maxing our 401ks yet, but hope to soon. I am aware of the Roth ladder, but have some trouble getting the math to work even then. You can only convert $20k/year for a couple, which is less then half what we'd need since we'd still have a mortgage at $25k/year! And about 20 years of contributions is $200k (for 2).

Although, don't want to derail this, but I did the math again and I guess I see your point; At the end of year 5 we'd have $300k to take from the Roth, tax free. That would last us ~6 years so if we start at 50 that's past 59-1/2! So we'd only need the first 5 years of expenses in taxable, which should be something like less than $250,000.
Quick! To the spreadsheets! :D

seattlecyclone

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Yes, I'm not maxing our 401ks yet, but hope to soon. I am aware of the Roth ladder, but have some trouble getting the math to work even then. You can only convert $20k/year for a couple, which is less then half what we'd need since we'd still have a mortgage at $25k/year! And about 20 years of contributions is $200k (for 2).

No such limit on annual conversions exists. You can convert as much money to Roth as you want in a year. Just be aware that the conversion is subject to income tax at your marginal rate. Might you be getting the $20k number from the folks who plan to never pay any tax at all during retirement? $20k is the most "regular" (i.e. not capital gains/qualified dividend) income a married couple can have before exhausting their standard deduction and personal exemptions.
« Last Edit: August 26, 2014, 02:05:49 PM by seattlecyclone »

Scandium

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Yes. $20k is the deductions and exemptions for married couple. I guess one could do more than that and only pay 10% tax up to a point?

But there is no penalty for doing this conversion before 59, that's only for distributions?

seattlecyclone

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Right, there's no penalty on conversions, just your regular income tax rate, whatever that happens to be. Just like with income from work, the first $20k is tax free, the next $18k is taxed at 10%, and so on.

davo

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There is a guy in Boston who does lots of 529 consulting and strategy for 529 plan administrators. His name is Paul Curley and he works for Strategic Insight. I don't think their reports will be helpful for you as they are directed at 529 plan administrators.


But he shared a link to a firm that offers advising on saving for college. They might be the type of adviser you are looking for. Financial Innovations LLC helps clients financially plan for college.



I have not worked with either of these firms directly and am in no position to recommend them. These just popped up today and you may find them helpful.


Also, I think in 10 years the rules will have changed. Stay flexible!


-David

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.  "

Great link thanks for the article!!

You're welcome. There is a real lack of concise and useful information for 529 college savings options today. There are over 90 active plans all with different offerings, options, and rules. Some websites have tried to offer analysis, Morningstar.com, Collegesavings.org, and a few others. But I still think it is very confusing for parents trying to get a simple answer.

MMM's blog on simple investment strategy this week is very timely. Find a 529 savings plan that offers low cost broad index funds. Then put money into them each month. Done.
(this doesn't apply to OP who clearly has the basics down, and is moving to advanced methods.)