Free College - Shelter Assets

[LiseE]

So I read this blog post about how to go to college for free .. actually, no .. it was a youtube video.  Apparently some high end schools, like Harvard and Stanford will allow you to go to school for free if your income is below $125K and you show need.  (showing need I'm assuming means they will look at your assets)

So this realization has me thinking about sheltering our assets.  I don't know if my kids will get into Harvard with grade,etc .. but lets just say that they do.  We currently have $$$ in brokerage accounts for kids education and these accounts will be counted as assets.  We can convert those accounts to an IRA which would be sheltered.  This would be fine since kid #1 is going to college in 4 years and we are both 53 years old.  We will be close enough to 59 1/2 to start drawing from those sheltered accounts.  Another option is paying off our mortgage.  House is a sheltered asset.  We have a HELOC we could then pay for school with and pay that off each year.

I guess I never thought about sheltering assets for college.  I do not want my kids to qualify for loans .. that's not the plan .. that's why we've allocated the funds we have.  But if they can go to college for free???!!!  And we can keep the 300K we've have for their education .. of course I'd do that! 

Do people shelter assets for college financial need?  What are thoughts on this?  Again, this is a new idea to me but I hate the thought of insane cost of college. 

[economista]

I would just point out that unless they get into a school like Harvard/Yale that offer free tuition to low income students, sheltering your assets might not do a whole lot. In my case my family was really low income - $12k per year in income with 4 kids and absolutely no assets at all. Not even a savings account with $50 in it. According to the FAFSA our family contribution was $0 so I thought I would go to college for free. I got the highest scholarship my school offered, which was only for high achieving low income students, but it was only $35k per year and tuition (without room and board) was $50k per year. So I had to take out loans each year and work full time to make up the difference and pay for room and board.

So even if you shelter assets and make it so the FAFSA says your family contribution is $0 - it doesn't mean you actually end up paying $0.

[secondcor521]

I believe that there are very few schools that offer the deals that Harvard etc. do to low income families.  Perhaps just the Ivies and Stanford.  It is accurate that those few schools will offer such good deals.

However, very very very very few kids get into those schools.  And your kid has to have a lot more than grades to get in.  They have to have excellent grades, phenomenal test scores, plus be state-level awesome in sports or music or something, do community service...and then their chances are about 10% after all that.

And then to get those good deals, you have to be both income and asset poor.  Furthermore, there are two financial aid systems in the US - FAFSA and CSS.  The asset hiding you're describing helps with FAFSA, it will not help as much if at all with CSS.  Guess which one the Ivies, Stanford, and most of the best liberal arts schools use?  Yup, CSS.  (Well, they use both - FAFSA for government aid such as Pell Grants, CSS for institutional aid.)

I would suggest sitting down with your kids and making a list of the schools or kinds of schools they might apply to and get into, then look at those schools' financial aid situations.  You can get a very good estimate of what aid you might receive by using the schools' estimated cost calculators - each school is required to have one.

Two more things:  As economista points out, the school is not required to meet full aid.  So if the school costs $50K a year and your EFC is $0, the school may give you $25K in aid and say the rest is up to you.  Secondly, even if a school meets 100% of your aid, they can "meet" that aid with loans on the student and/or parent(s).  Rarely if ever does a school meet need with all grants/scholarships.

That all being said, there are things you can do to improve your chances of aid, particularly with FAFSA schools.  The web has a zillion resources on this.  The last tidbit I would point out is that FAFSA is now a prior-prior year system, so if your kid is starting college in the fall of 2023, then the first income tax return that you need to optimize is calendar year 2021.  Be aware and plan ahead.

[GoCubsGo]

Not to mention there is an income component in FASFA right? I'm sure you have income if you have a house and $300K in college savings. 

People do all sorts of things. A friend of my daughter's parents "divorced"  and the daughter used her father's sub $20K income and no assets to get a 90% paid ride to an Ivy school.  The mother made six figures. I think he had to have custody but it's all a sham.  She's partially latino which I guessed helped (not sure if that's true or not). 

I was looking at state residency rules for a state my kids want to go to school as it would be a massive savings in-state vs out state.  That is extremely difficult to do as well without meeting a lot of criteria (years in advance of them even enrolling).

Go to each colleges 'Net Price Calculator".  I would imagine no matter what you do, you won't see much of a discount.

[jpdx]

We currently have $$$ in brokerage accounts for kids education and these accounts will be counted as assets.  We can convert those accounts to an IRA which would be sheltered.

What's your plan here? You can only contribute 14K per year to an IRA (over age 50; two parents).

[Much Fishing to Do]

The easiest way to pull this off is to get your income low enough they don't even require you to list your assets at all (still below $50k of income I think).  If you're already FIREd then its a game of timing recognition of gains, minimizing dividends, etc (e.g. Berkshire Hathaway pays no dividends, so if you dont sell any in a year no income comes off of it).  This could obviously lower your EFC dramatically and reduce overall costs quite a bit.  We're not talking free college generally but if you cut costs in half that could be huge over a number of years over a number of children.

[secondcor521]

The easiest way to pull this off is to get your income low enough they don't even require you to list your assets at all (still below $50k of income I think).  If you're already FIREd then its a game of timing recognition of gains, minimizing dividends, etc (e.g. Berkshire Hathaway pays no dividends, so if you dont sell any in a year no income comes off of it).  This could obviously lower your EFC dramatically and reduce overall costs quite a bit.  We're not talking free college generally but if you cut costs in half that could be huge over a number of years over a number of children.

Note that low income in and of itself is necessary but not sufficient.  It is a multipart test.

Google "automatic zero EFC" or "simplified needs test" for details.

[economista]

Another thing to point out - at my school if you showed up as being an EFC of 0 the school had you fill out this packet of information that “proved” your family really survived on the amount they reported their income as. You had to list your rent/mortgage payment, how much you spend on groceries, how much you spend on health insurance, etc. In my case, there was a lot of explanations about section 8 housing vouchers, food stamps, Medicaid, etc.

[Jenny Wren]

If you have assets that need to be "sheltered," then isn't it ethically remiss to take advantage of these programs? I mean, it's effectively taking/stealing from a program the school has for poor and low income students who don't have the benefits of students that grew up in more affluent homes all so you can bank an extra $300k. I guess if you are okay with that...

[feelingroovy]

Yes, you should be maxing out your tax advantaged retirement space every year for a number of very good reasons.

But that you tube video sounds a little oversimplified. There is a lot of nuance in college financial aid. It's truly headache inducing.

If your kids are 4 years from college now is definitely the time to learn everything you can. I listened to this podcast recently and found it very helpful with links to other resources. https://financialmentor.com/podcast/how-to-pay-for-college/21152

[terran]

I'm no expert on this (done with college, and not having kids), but I think there are some schools that have financial aid filing requirements in addition to FAFSA that sometimes do count assets like IRAs. It seems likely that more money in IRAs is more likely to be favorable than more money in Brokerage accounts though. And it matches the investment order anyway, so you should probably be maxing out all tax advantaged accounts regardless.

I know I've run across some podcasts about "hacking" college costs. Maybe it was Choose FI? There's a bunch listed here: https://www.choosefi.com/?s=college, though you do have to wade through the articles too, which may or may not be useful.

[secondcor521]

I'm no expert on this (done with college, and not having kids), but I think there are some schools that have financial aid filing requirements in addition to FAFSA that sometimes do count assets like IRAs. It seems likely that more money in IRAs is more likely to be favorable than more money in Brokerage accounts though. And it matches the investment order anyway, so you should probably be maxing out all tax advantaged accounts regardless.

It sounds like you're referring to the CSS Profile.  It is used at several hundred colleges and universities which are, generally speaking, the more expensive, more well-known, and more prestigious schools.

They do ask more questions.  I think these schools can decide individually how they assess IRAs vs. business equity vs. home equity vs. rentals vs. taxable accounts, etc.  I don't think the formula is quite as cut and dried as FAFSA is.

Pretty much all schools, including CSS schools, collect FAFSA data.  For schools that collect both, it seems that federal aid (such as Pell grants and Perkins loans and such) is provided based on FAFSA data, and aid from the school itself is done according to CSS data.  I don't know how they reconcile the differences between the two sets of data, because families' apparent need can be different based on the different questions and data collected in each case.

[mr shankly]

I'm a little late to this thread, but one of our kids actually got into a fancy university (Not Harvard or Yale, but a well-endowed fancy private Ivy-type university in the Midwest)

We filled out the FAFSA and CSS, our total income was around 82k the year she applied, taxable income after deductions etc was around $42k.

Nearly all of our investments are tied up in tax-deferred accounts, so I'm not sure if that helped or not, but her tuition and room & board were nearly free for all four years. She did study over one summer and we paid for that in full. (Sticker price the year she started was around $65k ... ouch)

We didn't shield any of our assets, but again with everything tied up in retirement funds, that may have helped. That and the lower-than-100k annual income.

Edit: Home is also paid off, so there was very little in taxable, liquid assets when she went off to school. (This has presented other problems related to early retirement, but that's another story. Paid-off house was more important to us than college savings, apparently.)

Not sure if that helps answer your question, but there are other universities around the US that do this for lower income families, but I think they are usually very well endowed, expensive schools.

That said, our other college student is paying her own way at the local university, working 45 hour weeks in the summer, 16 hours a week during the year, and commuting from home. If your kid can get into the fancy university, more power to them. :)

[affordablehousing]

I think it's more worth your time to learn how to negotiate tuition costs and make sure your kid is top quality than it is to try to hide money. Just make sure your kid stands out and makes admissions directors salivate. If you get them panting, and competing with other top schools for your kid, that's how you really get some leverage to negotiate what you pay. I did that for college, went back and forth a few times and got the school to drop the tuition cost by $21K. For grad school, I called the admissions office and the program I was interested in, said that I was deciding between three top programs, and how could they incentivize my choice. Suddenly a scholarship opened up that paid for the first year.

Everything's negotiable, and it's a lot easier to be direct and say I'd go to your school if you could just help on the price, instead of getting divorced, losing a job, giving money to a friend, buying gold and burying it, cheating your taxes, emancipating your kid and making them get food stamps or any other more drastic tactics.

[boridi]

I think it's more worth your time to learn how to negotiate tuition costs and make sure your kid is top quality than it is to try to hide money. Just make sure your kid stands out and makes admissions directors salivate. If you get them panting, and competing with other top schools for your kid, that's how you really get some leverage to negotiate what you pay. I did that for college, went back and forth a few times and got the school to drop the tuition cost by $21K. For grad school, I called the admissions office and the program I was interested in, said that I was deciding between three top programs, and how could they incentivize my choice. Suddenly a scholarship opened up that paid for the first year.

Everything's negotiable, and it's a lot easier to be direct and say I'd go to your school if you could just help on the price, instead of getting divorced, losing a job, giving money to a friend, buying gold and burying it, cheating your taxes, emancipating your kid and making them get food stamps or any other more drastic tactics.

Another good strategy is to go to one of the great state schools with total tuition well under $21K/year.

[affordablehousing]

Or just become a plumber and make $175 an hour... even better than a state school.

[DadJokes]

If you have assets that need to be "sheltered," then isn't it ethically remiss to take advantage of these programs? I mean, it's effectively taking/stealing from a program the school has for poor and low income students who don't have the benefits of students that grew up in more affluent homes all so you can bank an extra $300k. I guess if you are okay with that...

Since schools are increasing their tuition at nearly quadruple the rate of inflation, I don't feel too bad if someone is taking advantage of the school. If someone hides assets, are they preventing actual low-income people from going? I don't know, but that would be more of an ethical dilemma to me.

As for our own strategy, I don't plan to pay for my child's college, so I don't think my income or assets should be included, but that's the system in place. We'll be FIRE'd by then and living off of retirement accounts, so we'll appear low income by the current standard.

[Jenny Wren]

If you have assets that need to be "sheltered," then isn't it ethically remiss to take advantage of these programs? I mean, it's effectively taking/stealing from a program the school has for poor and low income students who don't have the benefits of students that grew up in more affluent homes all so you can bank an extra $300k. I guess if you are okay with that...

Since schools are increasing their tuition at nearly quadruple the rate of inflation, I don't feel too bad if someone is taking advantage of the school. If someone hides assets, are they preventing actual low-income people from going? I don't know, but that would be more of an ethical dilemma to me.

So your argument is that two wrongs make a right? Wow. I don't know about federal funds, but yes, they are actually stealing the need-based state and school funds from actual low income students. These are finite amounts that the school works to distribute equitably by perceived need. Stepping on the less privileged because tuition isn't fair isn't helping to fix a broken system, just taking advantage of those that have the least. But hey, stealing from the poor to give to the rich is the American way, ain't it? 

[DadJokes]

If you have assets that need to be "sheltered," then isn't it ethically remiss to take advantage of these programs? I mean, it's effectively taking/stealing from a program the school has for poor and low income students who don't have the benefits of students that grew up in more affluent homes all so you can bank an extra $300k. I guess if you are okay with that...

Since schools are increasing their tuition at nearly quadruple the rate of inflation, I don't feel too bad if someone is taking advantage of the school. If someone hides assets, are they preventing actual low-income people from going? I don't know, but that would be more of an ethical dilemma to me.

So your argument is that two wrongs make a right? Wow. I don't know about federal funds, but yes, they are actually stealing the need-based state and school funds from actual low income students. These are finite amounts that the school works to distribute equitably by perceived need. Stepping on the less privileged because tuition isn't fair isn't helping to fix a broken system, just taking advantage of those that have the least. But hey, stealing from the poor to give to the rich is the American way, ain't it?

Virtue signaling doesn't really advance the conversation in a productive manner. Do you have evidence that hiding assets to qualify for financial aid actually prevents actual low-income students from being able to acquire financial aid? As far as I can tell, aid is not a limited bucket, but rather an endless one that any number of people can draw from. There is not a limit on how many families can have an EFC of zero.

[economista]

If you have assets that need to be "sheltered," then isn't it ethically remiss to take advantage of these programs? I mean, it's effectively taking/stealing from a program the school has for poor and low income students who don't have the benefits of students that grew up in more affluent homes all so you can bank an extra $300k. I guess if you are okay with that...

Since schools are increasing their tuition at nearly quadruple the rate of inflation, I don't feel too bad if someone is taking advantage of the school. If someone hides assets, are they preventing actual low-income people from going? I don't know, but that would be more of an ethical dilemma to me.

So your argument is that two wrongs make a right? Wow. I don't know about federal funds, but yes, they are actually stealing the need-based state and school funds from actual low income students. These are finite amounts that the school works to distribute equitably by perceived need. Stepping on the less privileged because tuition isn't fair isn't helping to fix a broken system, just taking advantage of those that have the least. But hey, stealing from the poor to give to the rich is the American way, ain't it?

Virtue signaling doesn't really advance the conversation in a productive manner. Do you have evidence that hiding assets to qualify for financial aid actually prevents actual low-income students from being able to acquire financial aid? As far as I can tell, aid is not a limited bucket, but rather an endless one that any number of people can draw from. There is not a limit on how many families can have an EFC of zero.

https://www.propublica.org/article/university-of-illinois-financial-aid-fafsa-parents-guardianship-children-students

Actually, in Illinois they have shown that it takes away from disadvantaged students. There is a state grant called the MAP grant that is available on a first come, first served basis and according to this article last year there were 82,000 students who qualified but didn’t get it because the money had run out. Every high income student whose family cheated to get that money literally took money from a low income student who really could’ve used it. It might have made the difference in whether that student attended college or not. Each University also has a limited amount of scholarship money available for low income students, and which low income students receive it is usually based upon merit. When you have a high income student who had every advantage growing up competing for that money against actual low income students who didn’t benefit from tutors, test prep classes, etc, it definitely takes an already unfair system and skews it even further.

[DadJokes]

If you have assets that need to be "sheltered," then isn't it ethically remiss to take advantage of these programs? I mean, it's effectively taking/stealing from a program the school has for poor and low income students who don't have the benefits of students that grew up in more affluent homes all so you can bank an extra $300k. I guess if you are okay with that...

Since schools are increasing their tuition at nearly quadruple the rate of inflation, I don't feel too bad if someone is taking advantage of the school. If someone hides assets, are they preventing actual low-income people from going? I don't know, but that would be more of an ethical dilemma to me.

So your argument is that two wrongs make a right? Wow. I don't know about federal funds, but yes, they are actually stealing the need-based state and school funds from actual low income students. These are finite amounts that the school works to distribute equitably by perceived need. Stepping on the less privileged because tuition isn't fair isn't helping to fix a broken system, just taking advantage of those that have the least. But hey, stealing from the poor to give to the rich is the American way, ain't it?

Virtue signaling doesn't really advance the conversation in a productive manner. Do you have evidence that hiding assets to qualify for financial aid actually prevents actual low-income students from being able to acquire financial aid? As far as I can tell, aid is not a limited bucket, but rather an endless one that any number of people can draw from. There is not a limit on how many families can have an EFC of zero.

https://www.propublica.org/article/university-of-illinois-financial-aid-fafsa-parents-guardianship-children-students

Actually, in Illinois they have shown that it takes away from disadvantaged students. There is a state grant called the MAP grant that is available on a first come, first served basis and according to this article last year there were 82,000 students who qualified but didn’t get it because the money had run out. Every high income student whose family cheated to get that money literally took money from a low income student who really could’ve used it. It might have made the difference in whether that student attended college or not. Each University also has a limited amount of scholarship money available for low income students, and which low income students receive it is usually based upon merit. When you have a high income student who had every advantage growing up competing for that money against actual low income students who didn’t benefit from tutors, test prep classes, etc, it definitely takes an already unfair system and skews it even further.

Thank you for the article!

[trollwithamustache]

I do not know anyone who has done this fully within IRS rules... there are stories of basically 3 years out, shoving all your assets into a business, and hoarding cash in that corporation/LLC that is privately held... but then these people are keeping the corp/LLC value artificially low.  its great if they get away with it, but the audit risk feels a bit spicy for me.

[TomTX]

We're finally going to have a "good" family income this month with both of us at good State jobs with access to both 401k and 457 plans.

Which means in 2020 we will stash $90k in tax advantaged accounts. $19.5x4 401/457 + $12k IRA.

[cangelosibrown]

So this realization has me thinking about sheltering our assets.  I don't know if my kids will get into Harvard with grade,etc .. but lets just say that they do.  We currently have $$$ in brokerage accounts for kids education and these accounts will be counted as assets.  We can convert those accounts to an IRA which would be sheltered.  This would be fine since kid #1 is going to college in 4 years and we are both 53 years old.  We will be close enough to 59 1/2 to start drawing from those sheltered accounts.  Another option is paying off our mortgage.  House is a sheltered asset.  We have a HELOC we could then pay for school with and pay that off each year.

Bolding mine.

You can't just convert stuff to an IRA. If you could, we'd all just do that, for a number of reasons.  You should be maxing out what you can put into an IRA (and/or 401k/403b/solo 401k) for all those same reasons. And it sounds like you should be maxing out what you can put into them even if it means having to draw down your existing non-retirement assets, which I guess you could consider "converting them to IRA's" in some sense. There's no way you can get the 300k you say you have set aside done by the time your kids are college ages.

I've actually run the numbers on this stuff for my own situation, and there's no way I can shield enough assets to make itwork without resorting to stuff that's pretty egregiously unethical (IMO). My child is young enough that I'm just hoping the entire system is different than it is now by the time he's of age. Not because I can't game the current system, but because the current system is terrible.