The Money Mustache Community
General Discussion => Welcome and General Discussion => Topic started by: DoubleDown on December 17, 2014, 06:08:57 PM
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Another thread (about paying off one's home mortgage) led to a discussion about maximizing financial aid for kids. @Sol suggested he should start a thread on this, but I stole his idea after looking into this further on my own. This thread can be a place for proposing and discussing strategies for maximizing financial aid received. Early retirees face some interesting dilemmas in qualifying for aid, as financial aid need formulas generally penalize saving (while spendthrifts are "rewarded" by not accruing any financial assets or significant net worth and instead buying cars, boats, and vacations).
Another challenge is having enough taxable funds on hand to support ER until old age, but not having those assets kill your need determination. This site gives some really good general strategies for maximizing aid:
http://www.finaid.org/fafsa/maximize.phtml
Investments do not include the home in which your parents live; the value of life insurance and retirement plans (401[k] plans, pension funds, annuities, noneducation IRAs, Keogh plans, etc.); small businesses that are owned and controlled by the family.
So, a general strategy is to shelter assets into vehicles that are not considered "investments" as far as financial aid is concerned. Besides having money sheltered in typical 401(k)/IRA funds, I can see these being some extremely useful methods for an early retiree to shelter taxable investments while being able to access those funds when needed:
- Sinking taxable assets into the primary residence (that is, paying down the mortgage) prior to applying (then accessing those funds later via a HELOC, as needed)
- Moving taxable assets into a family-owned business (then liquidating the business later and distributing capital back to the family). This could essentially be an ER hobby; there is no requirement that the business actually be profitable or have any minimum amount of gross receipts, etc. (but no doubt it can't just be a "front" -- that would have to be illegal).
- Buying a tax-deferred annuity, then accessing the funds via the usual 72(t) methods (and also might be able to access those funds penalty-free to pay for college education -- have to look into that one further). Even if you pay the 10% penalty, it may be negligible in the overall scheme of things. Watch out for early surrender fees.
Another important note is that the need formulas do allow a certain amount of taxable investments to be "protected." There is a whole table based on the parents' ages and amount of investments. For a 50-year old, it's about $35,000. After that, about 5.6% of additional assets are considered available to pay for college. So, you could safely keep about $35,000 on hand in cash, savings, and taxable investments; after that, you may want to consider sheltering.
Note: I'm personally not interested in a debate over the philosophical or ethical considerations of maximizing aid, although others may want to go off on that tangent. I'm interested in exploring 100% legal methods, just as I would do to minimize my taxes, and those who find these strategies distasteful for personal or ethical reasons certainly do not have to do them.
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Is it possible to have a different family member hold a 529 plan for a child, to shield that account from FAFSA?
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Seems like a lot of work. Why not just pay an attorney $200 an legally emancipate the kids? Or perhaps that would impact tax deductions?
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Seems like a lot of work. Why not just pay an attorney $200 an legally emancipate the kids? Or perhaps that would impact tax deductions?
Being, or having been, an emancipated minor seems to be a "factor" in a determination of whether a student is independent, but not to be conclusive.
http://www.thesalliemaefund.org/faqs/finaid/#a10
Being an orphan seems like a slam dunk, though.
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The easiest way to shield ALL of your assets, at least from the federal financial aid methodology, is to reduce your AGI to under $50k.
If your previous 1040A (not a 1040, which means you can't itemize) shows an AGI of $49,999, you can have millions in assets and they won't touch any of it. All assets are sheltered if your income is below $50k.
Which isn't the same as having a zero Expected Family Contribution (EFC), because they may still want a piece of the income you do show. You only get a zero EFC if your tax form shows income under $24k.
But for an early retiree with a large taxable account or who is old enough to access a Roth IRA, showing low income should be easy because you can live off of those savings without showing any income at all.
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Is it possible to have a different family member hold a 529 plan for a child, to shield that account from FAFSA?
Sure, you can do that, and it will help, but it's not really a game changer.
Assets like a 529 are assessed at a fixed percentage per year of expected contribution. Right now, a parent's assets are assessed at 5.64% per year of expected contribution so if you have $20k saved up for college you'd be expected to pay like $1100 per year. If you only have one kid in college, you're probably planning to contribute more than 5.64% per year anyway.
A student's assets are assessed at a more onerous 20% rate, but fortunately a 529 account counts as a parental asset even if it's in the student's name.
And as mentioned above, none of this matters if you can get your AGI down under $50k in the "base year" before you apply. In that case, all of your assets including your 529 is excluded.
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Sol is right about filing on the 1040A and getting your AGI below $50k to shield your assets or $24k to get a $0 EFC. More info is in this PDF showing how to calculate your EFC (http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf).
The thing is, arranging your life so that you can file the 1040A might be difficult for many early retirees. You can't sell any stocks in taxable accounts while your kid is in college, or else you'll have capital gains/losses that require the full form 1040. You can't contribute to or withdraw from an HSA, because that has its own form that can only be filed with form 1040. You can't have any business or rental income. You can't itemize deductions, so you'll have to weigh any lost tax deductions against increased financial aid (likely worth it, but maybe not).
If your retirement plans allow you to live off of dividends and withdrawals from retirement accounts (Roth pipeline), and possibly a part-time job as someone else's employee, the 1040A thing could be a winning strategy for you. If you're counting on capital gains or rental income to make up a piece of the puzzle, you may have to seek an alternative financial aid strategy.
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Being an orphan seems like a slam dunk, though.
Sure is. Just make sure if you ever die whoever takes your kids (assuming grandparents, aunts/uncles of kids) that they just become their guardians vs. adopting them.
Adopted by grandparents, got full financial aid because I had no parent income to put on FAFSA.
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Another thread (about paying off one's home mortgage) led to a discussion about maximizing financial aid for kids. @Sol suggested he should start a thread on this, but I stole his idea after looking into this further on my own. This thread can be a place for proposing and discussing strategies for maximizing financial aid received. Early retirees face some interesting dilemmas in qualifying for aid, as financial aid need formulas generally penalize saving (while spendthrifts are "rewarded" by not accruing any financial assets or significant net worth and instead buying cars, boats, and vacations).
Another challenge is having enough taxable funds on hand to support ER until old age, but not having those assets kill your need determination. This site gives some really good general strategies for maximizing aid:
http://www.finaid.org/fafsa/maximize.phtml
Investments do not include the home in which your parents live; the value of life insurance and retirement plans (401[k] plans, pension funds, annuities, noneducation IRAs, Keogh plans, etc.); small businesses that are owned and controlled by the family.
So, a general strategy is to shelter assets into vehicles that are not considered "investments" as far as financial aid is concerned. Besides having money sheltered in typical 401(k)/IRA funds, I can see these being some extremely useful methods for an early retiree to shelter taxable investments while being able to access those funds when needed:
- Sinking taxable assets into the primary residence (that is, paying down the mortgage) prior to applying (then accessing those funds later via a HELOC, as needed)
- Moving taxable assets into a family-owned business (then liquidating the business later and distributing capital back to the family). This could essentially be an ER hobby; there is no requirement that the business actually be profitable or have any minimum amount of gross receipts, etc. (but no doubt it can't just be a "front" -- that would have to be illegal).
- Buying a tax-deferred annuity, then accessing the funds via the usual 72(t) methods (and also might be able to access those funds penalty-free to pay for college education -- have to look into that one further). Even if you pay the 10% penalty, it may be negligible in the overall scheme of things. Watch out for early surrender fees.
Another important note is that the need formulas do allow a certain amount of taxable investments to be "protected." There is a whole table based on the parents' ages and amount of investments. For a 50-year old, it's about $35,000. After that, about 5.6% of additional assets are considered available to pay for college. So, you could safely keep about $35,000 on hand in cash, savings, and taxable investments; after that, you may want to consider sheltering.
Note: I'm personally not interested in a debate over the philosophical or ethical considerations of maximizing aid, although others may want to go off on that tangent. I'm interested in exploring 100% legal methods, just as I would do to minimize my taxes, and those who find these strategies distasteful for personal or ethical reasons certainly do not have to do them.
That $35k in protected investments is only if the parents are married. If single, only about $8k is protected for a 50 yo. This make absolutely no sense to me - shouldn't a single parent have a greater need for savings, since they have no partner as backup?
Look up the FAFSA charts from years past. The numbers were much higher when DD1 first filled out the FAFSA in 2008. The asset protection numbers have dropped each year that I've looked at. Where will they be ten years from now, when my DS5 is in college?
We've qualified for the Simplified Needs Test since we qualify for free/reduced school lunches. The test for that is income only, no asset test. If you read the SNT rules carefully, they ask if anyone in the family received benefits in certain previous years (in 2012 or 2013 on the 2014-15 FAFSA application), so you may not need to receive it every year (especially since free/reduced lunch eligibility covers a school year, which straddles two calendar years), as long as there are younger siblings to keep eligibility going. The last child couldn't use this for all four years of college, since it looks back two years. E.g., if the student graduated from HS in 2014, and was receiving free/reduced lunches thru 2014, they would fill out FAFSAs for 2014-15, 2015-16, 2016-17, 2017-18. The last one's test would be received benefits in 2015 or 2016, both of which are after the student left HS.
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Is it possible to have a different family member hold a 529 plan for a child, to shield that account from FAFSA?
Sure, you can do that, and it will help, but it's not really a game changer.
Assets like a 529 are assessed at a fixed percentage per year of expected contribution. Right now, a parent's assets are assessed at 5.64% per year of expected contribution so if you have $20k saved up for college you'd be expected to pay like $1100 per year. If you only have one kid in college, you're probably planning to contribute more than 5.64% per year anyway.
A student's assets are assessed at a more onerous 20% rate, but fortunately a 529 account counts as a parental asset even if it's in the student's name.
And as mentioned above, none of this matters if you can get your AGI down under $50k in the "base year" before you apply. In that case, all of your assets including your 529 is excluded.
I think (s)he was asking if you can put the 529s in the grandparents' (or aunts/uncles) names vs. the kids' or parents'. As far as I know, the FAFSA calc looks at parents and kids, but not grandparents. Someone else can chime in to correct me if I'm wrong.
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Grandparents and 529s are both good and bad. The money is not included for either the kid or the parent while sitting in the account. However once it is spent it counts as the kids income. You therefore want to use an grandparent 529 money in the last year (or two years if it is enough to cover etc). This would apply to anyone aunts uncles etc.
This is my understanding anyway. I have looked into because I want the grandparents to set up 529 for my kids.
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Grandparents and 529s are both good and bad. The money is not included for either the kid or the parent while sitting in the account. However once it is spent it counts as the kids income. You therefore want to use an grandparent 529 money in the last year (or two years if it is enough to cover etc). This would apply to anyone aunts uncles etc.
This is my understanding anyway. I have looked into because I want the grandparents to set up 529 for my kids.
Thanks for the heads up on that little rule. I'll keep it in mind.
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Right now, a parent's assets are assessed at 5.64% per year of expected contribution
Personally, just discovering that figure on a financial aid website was revelatory to me. After taking out the "protected savings" based on your age, 5.64% doesn't seem so onerous to me.
If you can't meet the 1040A threshold (let alone the automatic $0 EFC), knowing this calculation gives a pretty easy way to determine the expected EFC, and also allows us to decide how much effort we want to put in to reduce the EFC by sheltering assets. For example, if your assets yield an EFC of $1000, that's pretty good in my book, and could easily be earned by the student alone with some summer work or scholarships. If I can get down to a $1000 - 2000 EFC, I probably won't bother doing anything to shelter assets (like paying down the mortgage).
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For example, if your assets yield an EFC of $1000, that's pretty good in my book, and could easily be earned by the student alone with some summer work or scholarships. If I can get down to a $1000 - 2000 EFC, I probably won't bother doing anything to shelter assets (like paying down the mortgage).
To be clear, the EFC usually is usually calculated accounting for any student earnings. Like if you are poor enough, your kid can qualify for a subsidized work study job on campus, and those earnings are considered as part of your award package and not part of the EFC.
So if you want to give your kid an extra $2k obligation and expect him to earn it himself, you certainly can but keep in mind that's going to be $2k more than he was already going to have to earn through the types of jobs the government thinks students should have.
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From the research I've done into "sculpting" your assets for maximum financial aid, what's really killer is how the fafsa treats rental property.
Basically, if you have rentals, you're up the creek. The net worth (market value - mortgage) of the rental property is considered a liquid asset for the purposes of the fafsa calculation. Even if your cashflow is relatively modest, assuming you've held a property for many years by the time your kids hit college... there will be a hit.
I haven't found a good way to avoid the rental trap. Funny enough, if you own a business then those business assets are explicitly not included in the fafsa calculations. But they make it clear that rental property doesn't qualify as a business.
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From the research I've done into "sculpting" your assets for maximum financial aid, what's really killer is how the fafsa treats rental property.
Basically, if you have rentals, you're up the creek. The net worth (market value - mortgage) of the rental property is considered a liquid asset for the purposes of the fafsa calculation. Even if your cashflow is relatively modest, assuming you've held a property for many years by the time your kids hit college... there will be a hit.
I haven't found a good way to avoid the rental trap. Funny enough, if you own a business then those business assets are explicitly not included in the fafsa calculations. But they make it clear that rental property doesn't qualify as a business.
Rental property doesn't count as a business even if it's owned by something like an LLC or S-corp? What if said entity has multiple shareholders (e.g. other family members)? What if said entity also offers services (e.g. property management for third-party-owned property) or has employees?
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This definitely doesn't work for everyone, but each child's EFC is lower if they attend school concurrently. My older and younger siblings both went to state school, so I always had at least one sibling in college as well, which made the price reasonable enough for me to attend a private school.
So if you've got one kid a year or two older than the other, maybe encourage the older one to take a gap year to increase the overlap. Otherwise this doesn't really help you, sorry.
Sidenote: EFC isn't necessarily what you pay. At my school, we were expected to pay EFC + $2k work study + $3-5k loans, unless you fell under certain income limits when they would take out the loans. Outside scholarships could reduce the work study or loans, but never the EFC, according to their policy, but outside scholarships are incredibly difficult to get. (Even as a 4.0 student, I only got a small, local one that was directed at my father's career.) But every school is different, making this game harder to play if you don't know where your kid is going.
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For example, if your assets yield an EFC of $1000, that's pretty good in my book, and could easily be earned by the student alone with some summer work or scholarships. If I can get down to a $1000 - 2000 EFC, I probably won't bother doing anything to shelter assets (like paying down the mortgage).
To be clear, the EFC usually is usually calculated accounting for any student earnings. Like if you are poor enough, your kid can qualify for a subsidized work study job on campus, and those earnings are considered as part of your award package and not part of the EFC.
So if you want to give your kid an extra $2k obligation and expect him to earn it himself, you certainly can but keep in mind that's going to be $2k more than he was already going to have to earn through the types of jobs the government thinks students should have.
That's actually not the case Sol. When you get your award, the EFC typically will be broken down into two categories: the parental contribution and the student contribution (both or either could be $0, however). The student contribution is expected to come from their own savings, merit scholarships, and/or non-Work Study earnings (e.g., summer earnings working as a life guard, selling ice cream, painting houses...). Once need is determined (cost of education minus EFC), then aid will be awarded in some combination of grants, loans, and Work Study to cover some or all of that need (at a public institution, you'll almost certainly have the entire need met in some form, but not all by grants).
So, work study jobs are intended to fill unmet financial need, not the "student contribution."
The Work Study jobs, as you may already know, are available during the school year, and they are available only to those students who receive Federal Work Study grants. They are supposed to give valuable job training at a semi-professional level, similar to an internship (so there will be no Work Study jobs for life guards, ice cream sales, or house painting). The jobs also usually pay far higher than wages for other college student jobs, as they are subsidized by the Federal government (employers pay only 30% of the wage, the Feds pick up the rest). In that way, it's pretty easy to earn your Work Study award without putting in too many hours.
When you fill out the FAFSA, you will be asked if you want to receive loans, work study, or a combination of both. The choice is entirely optional, and the school will generally award your preference. They will first meet your need with whatever maximum Federal and State grants they can award. They will then award loans or work study according to your stated preference, then finally add back in any merit scholarships your child receives to reduce loans or work study.
How I know this: I received a Work Study grant in college, and ironically the Work Study job I selected was to be a financial aid counselor at my university for several years. I had a separate student and parental contribution, independent of the Work Study award/earnings (for me, as we were pretty poor, parental contribution was always $0 and I was assessed the minimum my school gave, which was non-zero by policy). As it turns out, since I lived very inexpensively, I was actually able to cover my student contribution by saving (and not spending on pizza, etc.) some of my Work Study earnings, but that was "off the grid." The school comes up with a standard budget, but you're always free to live cheaper than the average budget.
I mentioned the wages were higher -- while my peers were earning minimum wage (which at the time was $3.35/hour) at campus jobs (book store, food service, etc.), I earned $11 - $13/hour along with very valuable professional experience that helped land a real job out of school (not to mention giving me an intimate, inside look at how financial aid works to my own benefit). I really recommend having kids take Work Study and avoiding loans. They'll get really valuable experience working for college professors, in labs, in University administration (office) jobs, etc. Also, if it looks like you can't earn all the work study award, you can always switch it back to loans as long as you give the school enough notice.
So, you are off the hook in paying the student contribution amount assessed to your kids, unless you feel like doing so! You will not be saddling them with your own contribution in that case. I'm going to leave my kids on the hook to cover that student amount, as I feel it's a reasonable thing for them to do (as does the school and financial aid policy). Or, they can cover the student contribution by being frugal and living below the standard budget.
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That's actually not the case Sol. When you get your award, the EFC typically will be broken down into two categories
I'm new to the FAFSA game, so perhaps I misunderstood the results I've been seeing. All of the simulated "awards" that I've seen based on income and assets have included some kind of federal workstudy as something the student was expected to contribute, and I assumed that meant they were going to pay the student to work and then the student would be expected to pay some of that income back to the school for tuition, so the workstudy job is effectively like a scholarship that you have to earn hourly.
Is that not correct? Is the federal workstudy income supposed to cover your non-tuition portion of the listed Cost Of Attendance?
From the research I've done into "sculpting" your assets for maximum financial aid, what's really killer is how the fafsa treats rental property... I haven't found a good way to avoid the rental trap.
Well there's still the $50k asset exclusion test. They won't look at your rental properties if you can get your AGI under $50k in the applicant's base year. For an early retiree utilizing the Roth IRA pipeline, this means probably converting something less than $50k in that year (after accounting for any taxable interest or dividends).
One possible option that we're considering is selling rental property to pay off our primary mortgage. This would remove the rental asset from our books, and since we'd use the proceeds to pay off our own house it might also coincidentally get our income down under $50k since we would no longer have to be Roth-converting an amount that would include paying our mortgage.
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From the research I've done into "sculpting" your assets for maximum financial aid, what's really killer is how the fafsa treats rental property.
Basically, if you have rentals, you're up the creek. The net worth (market value - mortgage) of the rental property is considered a liquid asset for the purposes of the fafsa calculation. Even if your cashflow is relatively modest, assuming you've held a property for many years by the time your kids hit college... there will be a hit.
I haven't found a good way to avoid the rental trap. Funny enough, if you own a business then those business assets are explicitly not included in the fafsa calculations. But they make it clear that rental property doesn't qualify as a business.
Rental property doesn't count as a business even if it's owned by something like an LLC or S-corp? What if said entity has multiple shareholders (e.g. other family members)? What if said entity also offers services (e.g. property management for third-party-owned property) or has employees?
Seems like it's a confusing point, and there's conflicting info online. But from what I've found, trying to tell the IRS that rental property is a "business" vs "passive investment" is a pretty high bar:
For real estate to be considered a business asset, it must be used in the operation of the business, not incidental to it. Subregulatory guidance published by the US Department of Education indicates that “A rental property would have to be part of a formally recognized business to be reported as such, and it usually would provide additional services like regular cleaning, linen, or maid service.” This is similar to IRS guidance concerning whether rental income from real estate must be reported on Schedule E or Schedule C of IRS Form 1040. According to IRS Publication 527, in order to report the rental income on Schedule C, the taxpayer must “provide significant services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service” and “significant services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc.”
From: http://www.fastweb.com/financial-aid/articles/3650-when-is-real-estate-reported-as-a-business-asset-on-the-fafsa
And there's the rub. If you are filing schedule C instead of Schedule E, you'll be paying employment taxes on your rental income. For many of us, that would likely negate much of the FAFSA benefits of excluding that asset.
Here's a discussion on Bigger Pockets talking about the same thing:
http://www.biggerpockets.com/forums/51/topics/106726-advice-on-restructuring-into-an-llc-s
May in fact be more trouble than it's worth. Definitely seems like something that would require the assistance of a CPA or Tax Attorney to help think through and structure correctly.
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I'm new to the FAFSA game, so perhaps I misunderstood the results I've been seeing. All of the simulated "awards" that I've seen based on income and assets have included some kind of federal workstudy as something the student was expected to contribute, and I assumed that meant they were going to pay the student to work and then the student would be expected to pay some of that income back to the school for tuition, so the workstudy job is effectively like a scholarship that you have to earn hourly.
Is that not correct? Is the federal workstudy income supposed to cover your non-tuition portion of the listed Cost Of Attendance?
You've got it pretty much correct. It works basically like this:
Cost of Attendance = COA (same for all students)
EFC = Expected Family Contribution = Parent Contribution (PC) + Student Contribution (SC)
Financial Need (FN) = COA - EFC
The important point from the earlier post, is SC is independent of work study (that is, it is assessed independently of any work study being awarded). It is determined based on the student's stated (non-work study) income/savings/assets. Therefore, the parent is not expected to cover or subsidize the SC. That is the contribution the student is expected to make on their own, without work study earnings (from their own savings, summer jobs, non-work study part time jobs during the school year, or perhaps they can offset it with merit scholarships they've earned). Work study is awarded to help meet the FN, not the SC.
Regarding work study earnings: Generally, 100% of your FN will be met by the school in some form. It will be met first with the maximum grants they can give you (e.g., Pell + state grants), then with a combination of loans + work study (depending on your stated preference when you apply). You don't have to take work study, it's given if you request it as a means of limiting the loans the student takes out. The school (and government) doesn't care how the student spends their work study earnings to meet the COA; whether it goes towards tuition, books, room and board, personal care, etc. They'd basically only care if the student was spending it on hookers and blow, not that they'd have any way of knowing that.
Hope this helps, does this make sense?
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From the research I've done into "sculpting" your assets for maximum financial aid, what's really killer is how the fafsa treats rental property... I haven't found a good way to avoid the rental trap.
Well there's still the $50k asset exclusion test. They won't look at your rental properties if you can get your AGI under $50k in the applicant's base year. For an early retiree utilizing the Roth IRA pipeline, this means probably converting something less than $50k in that year (after accounting for any taxable interest or dividends).
But to qualify for the $50k asset exclusion test, you also cannot file a form 1040 (must file 1040A or EZ). With rental property, I'd say it's certain you'll have to file a regular 1040. Therefore, rental property will be included in the asset test and, as others have noted, it is considered passive income, not business income. The only way to have rental property counted as a business is if work or a service is being performed, like operating a cleaning business. Residential rental property most certainly does not qualify as a business.
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Specifically for Canadians.
http://www.moneysense.ca/save/tfsa/key-to-rich-qualifying-for-gis-is-large-tfsa
Kinda a "gray" area because the GIS funding is supposed to help those who need supplemental income. There is nothing illegal about doing this though.
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For example, if your assets yield an EFC of $1000, that's pretty good in my book, and could easily be earned by the student alone with some summer work or scholarships. If I can get down to a $1000 - 2000 EFC, I probably won't bother doing anything to shelter assets (like paying down the mortgage).
To be clear, the EFC usually is usually calculated accounting for any student earnings. Like if you are poor enough, your kid can qualify for a subsidized work study job on campus, and those earnings are considered as part of your award package and not part of the EFC.
So if you want to give your kid an extra $2k obligation and expect him to earn it himself, you certainly can but keep in mind that's going to be $2k more than he was already going to have to earn through the types of jobs the government thinks students should have.
That's actually not the case Sol. When you get your award, the EFC typically will be broken down into two categories: the parental contribution and the student contribution (both or either could be $0, however). The student contribution is expected to come from their own savings, merit scholarships, and/or non-Work Study earnings (e.g., summer earnings working as a life guard, selling ice cream, painting houses...). Once need is determined (cost of education minus EFC), then aid will be awarded in some combination of grants, loans, and Work Study to cover some or all of that need (at a public institution, you'll almost certainly have the entire need met in some form, but not all by grants).
So, work study jobs are intended to fill unmet financial need, not the "student contribution."
The Work Study jobs, as you may already know, are available during the school year, and they are available only to those students who receive Federal Work Study grants. They are supposed to give valuable job training at a semi-professional level, similar to an internship (so there will be no Work Study jobs for life guards, ice cream sales, or house painting). The jobs also usually pay far higher than wages for other college student jobs, as they are subsidized by the Federal government (employers pay only 30% of the wage, the Feds pick up the rest). In that way, it's pretty easy to earn your Work Study award without putting in too many hours.
When you fill out the FAFSA, you will be asked if you want to receive loans, work study, or a combination of both. The choice is entirely optional, and the school will generally award your preference. They will first meet your need with whatever maximum Federal and State grants they can award. They will then award loans or work study according to your stated preference, then finally add back in any merit scholarships your child receives to reduce loans or work study.
How I know this: I received a Work Study grant in college, and ironically the Work Study job I selected was to be a financial aid counselor at my university for several years. I had a separate student and parental contribution, independent of the Work Study award/earnings (for me, as we were pretty poor, parental contribution was always $0 and I was assessed the minimum my school gave, which was non-zero by policy). As it turns out, since I lived very inexpensively, I was actually able to cover my student contribution by saving (and not spending on pizza, etc.) some of my Work Study earnings, but that was "off the grid." The school comes up with a standard budget, but you're always free to live cheaper than the average budget.
I mentioned the wages were higher -- while my peers were earning minimum wage (which at the time was $3.35/hour) at campus jobs (book store, food service, etc.), I earned $11 - $13/hour along with very valuable professional experience that helped land a real job out of school (not to mention giving me an intimate, inside look at how financial aid works to my own benefit). I really recommend having kids take Work Study and avoiding loans. They'll get really valuable experience working for college professors, in labs, in University administration (office) jobs, etc. Also, if it looks like you can't earn all the work study award, you can always switch it back to loans as long as you give the school enough notice.
So, you are off the hook in paying the student contribution amount assessed to your kids, unless you feel like doing so! You will not be saddling them with your own contribution in that case. I'm going to leave my kids on the hook to cover that student amount, as I feel it's a reasonable thing for them to do (as does the school and financial aid policy). Or, they can cover the student contribution by being frugal and living below the standard budget.
Sorry, I have to disagree with parts of this. It may have been true at your college, when you attended, but it is not true now, at all colleges.
From what we have seen recently, with our three oldest in three different colleges, one state, two private:
Work Study is optional, both for the student and the college. Each college handles it differently. Generally it is minimum wage. Some schools find you a job, some leave that up to you (can be difficult to secure a position). You are limited in hours you can work per week (10?). Your award is part of your financial aid award, but you have to earn it first, so it can't be used to pay upfront bills like tuition and room and board. I believe there is a limit to the award, too, maybe $1000 per semester or so (that may be the financial aid award limit, but there is also a federal limit). If for some reason you don't earn up to your limit, it is just lost. Oh, yes, and many WS jobs are not fabulous jobs - they can be dining hall staff, dorm desk duty, lab desk, sports center desk staff, etc. Note taking seems to be a popular one, now, though; availability depends on your classes, obviously.
Generally, it seems that the first aid that is given is loans, then WS, then scholarships and grants last. You can decline loans, but they will not find more grant money for you to replace it. The only way I've seen a FA package contain no loans is if you qualify for a true full ride scholarship, and there are few of those these days.
The student's earnings can be at least $6000 before it impacts their portion of the EFC. I believe that 50% of their earnings beyond $6000 or so is added to their portion of the EFC.
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Interesting thread. I have three kids and the oldest is in Kindergarten so I am planning way ahead. (My favorite kind of planning!)
I didn't know about the FAFSA simplified EFC calculation which excludes assets. Seems like my family might be able to use this with a Roth Pipeline as our primary method of income. But I have a couple questions:
(1) With the Roth pipeline, do the annual Traditional -> Roth conversions count toward AGI? Or is it just the Roth distribution? In which line on the 1040 does the conversion come into play?
(2) The simplified EFC calc applies to FAFSA. What about the institutional methodology, which is used by a lot of private schools? Is there a comparable "simplified calculation" which excludes assets?
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This is great information for planning our income when the kids are in college. So far my plan is to retire at least 5 years before the kids get in college so that I can start the 401k/trad IRA > Roth pipeline and in these 5 years draw down our taxable brokerage account. When we retire, we will try to pay off the mortgage too so that will also further deplete the taxable account. I'd like to think that by the time we retire, with a paid off house, we can reduce our expenses such that our AGI would be below $50k but can't be sure so it seems like we should try to spend down as much of the taxable accounts as we can before the kids go to college.
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Seems like a lot of work. Why not just pay an attorney $200 an legally emancipate the kids? Or perhaps that would impact tax deductions?
This is way easier said than done. The normal sort of legal emancipation you think of doesn't do much for FAFSA, for example. For that sort of "emancipation" - and I use quotes because most college students are 18+, and therefore legally adults - you need to basically prove that your parents are dead, in prison, or on meth 24/7. I looked into it since I paid my own way and it's pretty much a non-starter.
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Interesting thread. I have three kids and the oldest is in Kindergarten so I am planning way ahead. (My favorite kind of planning!)
I didn't know about the FAFSA simplified EFC calculation which excludes assets. Seems like my family might be able to use this with a Roth Pipeline as our primary method of income. But I have a couple questions:
(1) With the Roth pipeline, do the annual Traditional -> Roth conversions count toward AGI? Or is it just the Roth distribution? In which line on the 1040 does the conversion come into play?
(2) The simplified EFC calc applies to FAFSA. What about the institutional methodology, which is used by a lot of private schools? Is there a comparable "simplified calculation" which excludes assets?
The conversions are the taxable income (line 15, I think). The Roth distribution should be tax free money.
The Institutional Methodology is different for each institution, hence the name. There can be a lot of difference between different schools. Despite having a 0 EFC, DD1's first choice school gapped her an amount equal to 50% of our household income. She petitioned for more aid, but they suggested she might be happier elsewhere. She was very happy with her second choice school, with no gap (and closer to home, so we were happier, too).
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With the Roth pipeline, do the annual Traditional -> Roth conversions count toward AGI? Or is it just the Roth distribution? In which line on the 1040 does the conversion come into play?
The conversions are the taxable income (line 15, I think). The Roth distribution should be tax free money.
OK, I see. The tax-free Roth distributions are reported on line 15a but not on 15b (taxable distributions), which is what gets included in AGI.
It seems to me that for a Roth pipeline, both the Traditional conversion (taxed) and the Roth distribution (untaxed) are included in the FAFSA income assessment. All the more reason to keep AGI under 24k and go straight to "$0 EFC". Otherwise, you start to look like you have $50k income even though you might be living on $25k. Since my 3 kids will span 10 years in college, many of my Roth pipeline dollars would get assessed by FAFSA as income twice - once going into Roth and once going out. Is this right? Woof.
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With the Roth pipeline, do the annual Traditional -> Roth conversions count toward AGI? Or is it just the Roth distribution? In which line on the 1040 does the conversion come into play?
The conversions are the taxable income (line 15, I think). The Roth distribution should be tax free money.
OK, I see. The tax-free Roth distributions are reported on line 15a but not on 15b (taxable distributions), which is what gets included in AGI.
It seems to me that for a Roth pipeline, both the Traditional conversion (taxed) and the Roth distribution (untaxed) are included in the FAFSA income assessment. All the more reason to keep AGI under 24k and go straight to "$0 EFC". Otherwise, you start to look like you have $50k income even though you might be living on $25k. Since my 3 kids will span 10 years in college, many of my Roth pipeline dollars would get assessed by FAFSA as income twice - once going into Roth and once going out. Is this right? Woof.
Yes, tax free income is counted against you by FAFSA. DH gets tax free military disability and in 2014 he got a back pay amount of like 30k...totally blew up my financial aid plans because I assumed it wouldn't be counted since the IRS doesn't care about it.
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^ But a Roth distribution of contribution or conversion amounts is not tax free income. It is a tax free retrieval of your own capital.
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^ But a Roth distribution of contribution or conversion amounts is not tax free income. It is a tax free retrieval of your own capital.
Regardless, FAFSA counts it as "income" for purposes of calculating EFC. Perhaps that is the tradeoff for retirement accounts being shielded from the asset portion of the assessment.
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This all seems a bit ridiculous to me. The government backs all student loans and ensures they cannot be discharged in bankruptcy. Because of this tuition rates have skyrocketed and there are plenty of banks happy to loan just about any amount to anyone with a pulse. If you truly think college is worthwhile (it is not, in many fields) and cannot afford it then you can finance it as easy or easier that any other luxury purchase like a car or buying piles on junk with a credit card.
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This all seems a bit ridiculous to me. The government backs all student loans and ensures they cannot be discharged in bankruptcy. Because of this tuition rates have skyrocketed and there are plenty of banks happy to loan just about any amount to anyone with a pulse. If you truly think college is worthwhile (it is not, in many fields) and cannot afford it then you can finance it as easy or easier that any other luxury purchase like a car or buying piles on junk with a credit card.
FAFSA qualifies you for grants and certain types of federal loans based on your income. Subsidized Stafford loans do not accrue interest while the student is in school, including graduate/professional school, which is a huge benefit. You're not eligible for them if your income is above a certain amount.
You also can't take out federal loans (even unsubsidized ones) without filling out the FAFSA. So, you'd have to go to a private loan company and deal with significantly higher interest rates and less repayment options and other benefits (some private loans do not discharge upon the student's death for example).
EDIT: Plus, the only borrower listed on a federal loan is the student, regardless of credit score or employment. If you get a private loan, and the student can't qualify, they must have a co-signer. Many parents/relatives are rightfully wary of putting themselves in that situation.
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So, a general strategy is to shelter assets into vehicles that are not considered "investments" as far as financial aid is concerned.
Wish I had thought of this. My kids could have had scholarships and I could have bought a really cool classic car that probably would have doubled in value by now!
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I'm just curious, couldn't you have a business own the rental properties (not sure if an LLC would be enough, but some states do let a single person form a corporation, so that should completely separate your business from your personal finances)?
Whatever the look back period is, make sure the business isn't paying its employee(s) (you and spouse) much, if anything. Once college is over, the business can pay you a nice fat bonus.
Am I missing anything obvious?
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I'm just curious, couldn't you have a business own the rental properties (not sure if an LLC would be enough, but some states do let a single person form a corporation, so that should completely separate your business from your personal finances)?
Whatever the look back period is, make sure the business isn't paying its employee(s) (you and spouse) much, if anything. Once college is over, the business can pay you a nice fat bonus.
Am I missing anything obvious?
IIRC both LLCs and S Corps are pass through entities for tax purposes (i.e., they are part of your tax return). C corps don't have that "problem", but they are taxed at corporate rates which is a whole 'nother set of issues.
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FAFSA qualifies you for grants and certain types of federal loans based on your income. Subsidized Stafford loans do not accrue interest while the student is in school, including graduate/professional school, which is a huge benefit. You're not eligible for them if your income is above a certain amount.
You also can't take out federal loans (even unsubsidized ones) without filling out the FAFSA. So, you'd have to go to a private loan company and deal with significantly higher interest rates and less repayment options and other benefits (some private loans do not discharge upon the student's death for example).
EDIT: Plus, the only borrower listed on a federal loan is the student, regardless of credit score or employment. If you get a private loan, and the student can't qualify, they must have a co-signer. Many parents/relatives are rightfully wary of putting themselves in that situation.
Grants/scholarships/etc. are not a realistic expectation in my experience as if you are employed, white, or male you are not eligible... Not worth wasting time that could be spent earning money if you are all three. Regarding interest rates, all my private loans are at lower interest rates than the two government loans I have. Government loans will be paid off this year, private loans will take a while. Private is really a silly term though as they're all effectively government loans given the government backing and regulation/laws. I'm a little surprised the topic of taking out student loans came up on this forum, as it's spending beyond your means analogous to borrowing for a fancy new luxury car (potentially every year for several years) or other frivolous purchase. Sure it's fine if you have the money and value that, but most 18-20 year olds don't have that amount of money.
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FAFSA qualifies you for grants and certain types of federal loans based on your income. Subsidized Stafford loans do not accrue interest while the student is in school, including graduate/professional school, which is a huge benefit. You're not eligible for them if your income is above a certain amount.
You also can't take out federal loans (even unsubsidized ones) without filling out the FAFSA. So, you'd have to go to a private loan company and deal with significantly higher interest rates and less repayment options and other benefits (some private loans do not discharge upon the student's death for example).
EDIT: Plus, the only borrower listed on a federal loan is the student, regardless of credit score or employment. If you get a private loan, and the student can't qualify, they must have a co-signer. Many parents/relatives are rightfully wary of putting themselves in that situation.
Grants/scholarships/etc. are not a realistic expectation in my experience as if you are employed, white, or male you are not eligible... Not worth wasting time that could be spent earning money if you are all three. Regarding interest rates, all my private loans are at lower interest rates than the two government loans I have. Government loans will be paid off this year, private loans will take a while. Private is really a silly term though as they're all effectively government loans given the government backing and regulation/laws. I'm a little surprised the topic of taking out student loans came up on this forum, as it's spending beyond your means analogous to borrowing for a fancy new luxury car (potentially every year for several years) or other frivolous purchase. Sure it's fine if you have the money and value that, but most 18-20 year olds don't have that amount of money.
There is a very big difference between taking a loan for a depreciating asset such as a car and taking a loan to acquire something (a college degree) that can vastly increase your earning potential. You can see a nice positive return from taking out that loan.
Then again, I would never advocate graduating with like $100k in student loan debt. I'm just saying blanket statements claiming student loans are analogous to loans for frivolous stuff like fancy cars is disingenuous
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So, a general strategy is to shelter assets into vehicles that are not considered "investments" as far as financial aid is concerned.
The typical options have been discussed, but I'll throw out another: A health savings account.
If you have the type of HSA that "rolls over", you may be able to shelter some tax-free money in this account. Right now my husband is depositing the maximum amount into ours each month, and we're spending less than that (obviously, one of us COULD become sick, and we COULD run through that money fast) . . . the result is that we're building up a healthy balance in our sick account. Seems like a lot of work. Why not just pay an attorney $200 an legally emancipate the kids? Or perhaps that would impact tax deductions?
You can't just emancipate your kids because you feel like doing it. If your kids are going to continue living in your house /or if you're supporting them elsewhere, they cannot be emancipated.
For a teen to be emancipated, his parents need to be essentially non-existent; for example, in jail or on drugs. Or the teen can be in the military. Or a judge has to say that the teen would be better off saying goodbye to you forever.
So if you've got one kid a year or two older than the other, maybe encourage the older one to take a gap year to increase the overlap. Otherwise this doesn't really help you, sorry.
Encourage your oldest child to delay his education in hopes of getting more financial aid? Horrible advice. I'm new to the FAFSA game, so perhaps I misunderstood the results I've been seeing. All of the simulated "awards" that I've seen based on income and assets have included some kind of federal workstudy as something the student was expected to contribute, and I assumed that meant they were going to pay the student to work and then the student would be expected to pay some of that income back to the school for tuition, so the workstudy job is effectively like a scholarship that you have to earn hourly.
I had a Work Study job back in the 80s, so my information may be outdated -- my own children, who are currently college students, do not qualify:
- When I filled out my FAFSA one of the questions was, "Are you interested in Work Study?" I always said yes. I always figured I had no right to ask for a Pell Grant (which I received), if I wasn't also willing to work.
- I was "awarded" X amount of money for Work Study. Perhaps it was $1000 per school year. This meant that I could earn UP TO $1000 during the school year. The jobs all paid minimum wage, so I'd do a little math and say, "I am allowed to work X number of hours per week/month." If I had worked 200 hours in the month of August, they'd have paid me -- but then I would've run out of hours in May, and even if I had worked, they wouldn't have paid me. Not once I'd earned the pre-approved $1000.
- Like all portions of financial aid, I could accept this or reject it.
- At the beginning of the semester, I'd go to the financial aid office, and they'd let me see the available jobs. Starting in my freshman year I started working for one of the academic departments. It was a good job, especially for a freshman, because it was so flexible: I always worked mid-day so the secretary could go to lunch. I was always busy, but never stressful-busy. I ran errands -- buying lunch or running to the on-campus bank for the professors, returning their library books, and other such things. I made xerox copies of tests. I went to various departments and stood in various lines on behalf of the secretary. I didn't need a car, and I wasn't expected to dress nicely.
- These Work Study jobs had to go to Work Study students. If they were not filled, then the departments would just be short on workers.
- This Work Study did not count towards a single penny of my tuition; rather, I was paid monthly, and that was my pocket money. It was never more than pocket money -- just a little bit for food, change for the laundry machines, and a bit to save for next semester's books.
However, LOTS of other jobs -- non Work Study jobs -- were available on campus. These other jobs were mostly in Food Service and Housing. These tended to pay more and were open to ANY student, regardless of financial aid status. Eventually I was working my Work Study job PLUS two housing jobs.
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A college "education" is intangible, it is not an asset. My experience was colleges are a joke, classes are at the dumbest common denominator, there is very little educating occurring and what is being taught is fairly irrelevant to careers in the field, and it does not increase earnings.
http://www.forbes.com/sites/susanadams/2013/05/28/half-of-college-grads-are-working-jobs-that-dont-require-a-degree/ (http://www.forbes.com/sites/susanadams/2013/05/28/half-of-college-grads-are-working-jobs-that-dont-require-a-degree/)
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/05/20/only-27-percent-of-college-grads-have-a-job-related-to-their-major/ (http://www.washingtonpost.com/blogs/wonkblog/wp/2013/05/20/only-27-percent-of-college-grads-have-a-job-related-to-their-major/)
http://money.cnn.com/2014/03/31/news/economy/minimum-wage-college-graduates/ (http://money.cnn.com/2014/03/31/news/economy/minimum-wage-college-graduates/)
College is just a big money grab and governments are working with universities to keep prices sky high. It falls in line with every other government program for private profits and public losses. The liberals latest scheme to make college "free" (i.e. paid for by government with stolen money) will only make things worse, as any remnant of the student being the customer will be gone, and the sole customer will be government in such "free" institutions, just like high school and grade school. If college is required means that in 12 years of government schooling (or government mandated curriculum in private schools) these young adults have learned no marketable skills, indicating a complete failure of government schooling.
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At my school, student labor jobs (NON work study) are also available in academic departments and administrative offices, in addition to the food services/housing jobs that MrsPete mentions. Student labor kids and work study kids work alongside each other doing the same things in the same jobs.
Also, you're not guaranteed a work-study award even if you're eligible for full Pell Grants. I check the box every year and I haven't gotten a work study award yet, despite sometimes receiving the max Pell Grant award. And another thing to remember is that you have to apply for the jobs even if you're awarded work study -- no one is going to contact your kid and tell them to show up on X day for X hours of work. They still have to apply, sometimes interview, and be offered a job.
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From the research I've done into "sculpting" your assets for maximum financial aid, what's really killer is how the fafsa treats rental property.
Basically, if you have rentals, you're up the creek. The net worth (market value - mortgage) of the rental property is considered a liquid asset for the purposes of the fafsa calculation. Even if your cashflow is relatively modest, assuming you've held a property for many years by the time your kids hit college... there will be a hit.
I haven't found a good way to avoid the rental trap. Funny enough, if you own a business then those business assets are explicitly not included in the fafsa calculations. But they make it clear that rental property doesn't qualify as a business.
What if the rental property is in a Trust or listed as property of a business would it still be factored in?
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With the Roth pipeline, do the annual Traditional -> Roth conversions count toward AGI? Or is it just the Roth distribution? In which line on the 1040 does the conversion come into play?
The conversions are the taxable income (line 15, I think). The Roth distribution should be tax free money.
OK, I see. The tax-free Roth distributions are reported on line 15a but not on 15b (taxable distributions), which is what gets included in AGI.
It seems to me that for a Roth pipeline, both the Traditional conversion (taxed) and the Roth distribution (untaxed) are included in the FAFSA income assessment. All the more reason to keep AGI under 24k and go straight to "$0 EFC". Otherwise, you start to look like you have $50k income even though you might be living on $25k. Since my 3 kids will span 10 years in college, many of my Roth pipeline dollars would get assessed by FAFSA as income twice - once going into Roth and once going out. Is this right? Woof.
Yes, tax free income is counted against you by FAFSA. DH gets tax free military disability and in 2014 he got a back pay amount of like 30k...totally blew up my financial aid plans because I assumed it wouldn't be counted since the IRS doesn't care about it.
Good catch. I wasn't aware the FAFSA "saw" Roth distributions, I also assumed it wouldn't be counted. Back to recalculating options for DS5. I was planning to transfer tIRA funds to Roth while he was in college to reduce RMDs later.
It seems like optimizing one area of our finances makes you ineligible in another area.
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With the Roth pipeline, do the annual Traditional -> Roth conversions count toward AGI? Or is it just the Roth distribution? In which line on the 1040 does the conversion come into play?
The conversions are the taxable income (line 15, I think). The Roth distribution should be tax free money.
OK, I see. The tax-free Roth distributions are reported on line 15a but not on 15b (taxable distributions), which is what gets included in AGI.
It seems to me that for a Roth pipeline, both the Traditional conversion (taxed) and the Roth distribution (untaxed) are included in the FAFSA income assessment. All the more reason to keep AGI under 24k and go straight to "$0 EFC". Otherwise, you start to look like you have $50k income even though you might be living on $25k. Since my 3 kids will span 10 years in college, many of my Roth pipeline dollars would get assessed by FAFSA as income twice - once going into Roth and once going out. Is this right? Woof.
Yes, tax free income is counted against you by FAFSA. DH gets tax free military disability and in 2014 he got a back pay amount of like 30k...totally blew up my financial aid plans because I assumed it wouldn't be counted since the IRS doesn't care about it.
Good catch. I wasn't aware the FAFSA "saw" Roth distributions, I also assumed it wouldn't be counted. Back to recalculating options for DS5. I was planning to transfer tIRA funds to Roth while he was in college to reduce RMDs later.
It seems like optimizing one area of our finances makes you ineligible in another area.
They probably do that on purpose :(
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A college "education" is intangible, it is not an asset. My experience was colleges are a joke, classes are at the dumbest common denominator, there is very little educating occurring and what is being taught is fairly irrelevant to careers in the field, and it does not increase earnings.
http://www.forbes.com/sites/susanadams/2013/05/28/half-of-college-grads-are-working-jobs-that-dont-require-a-degree/ (http://www.forbes.com/sites/susanadams/2013/05/28/half-of-college-grads-are-working-jobs-that-dont-require-a-degree/)
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/05/20/only-27-percent-of-college-grads-have-a-job-related-to-their-major/ (http://www.washingtonpost.com/blogs/wonkblog/wp/2013/05/20/only-27-percent-of-college-grads-have-a-job-related-to-their-major/)
http://money.cnn.com/2014/03/31/news/economy/minimum-wage-college-graduates/ (http://money.cnn.com/2014/03/31/news/economy/minimum-wage-college-graduates/)
College is just a big money grab and governments are working with universities to keep prices sky high. It falls in line with every other government program for private profits and public losses. The liberals latest scheme to make college "free" (i.e. paid for by government with stolen money) will only make things worse, as any remnant of the student being the customer will be gone, and the sole customer will be government in such "free" institutions, just like high school and grade school. If college is required means that in 12 years of government schooling (or government mandated curriculum in private schools) these young adults have learned no marketable skills, indicating a complete failure of government schooling.
It certainly is intangible, no arguments from me there. But I think you also just proved my point - you're trying to compare taking a loan for a depreciating asset vs taking a loan for an intangible one, which may or may not lead to a better financial future.
Just because your experience in college was a joke, it doesn't mean the general college experience is. You are just one data point among the millions that go to college.
And I certainly don't disagree that there are college majors that are (close to) useless in terms of increasing earning potential. But that doesn't mean all majors all like that.
For example, there is absolutely no chance that I could get a job as an engineer without my engineering degree. Don't believe me? Try it sometime. You'll be laughed out of the building if you try to fill an engineering job without an engineering degree.
All I'm saying is that people should make informed decisions. Clearly taking on debt to get a degree that will not increase your earning potential is financially a stupid idea. But there's also more to life than money. Mustachians should just take into account all pros and cons, financial or otherwise.
Also,
You are on a thread looking to maximize FAFSA aid. You're not going to find many people on this thread who think that college is simply a money grab. Filling out more financial forms and trying to minimize the FAFSA EFC is generally speaking not an enjoyable activity for most people.
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College is just a big money grab and governments are working with universities to keep prices sky high.
I don't think so. Neither my husband nor I could work in our current jobs if we didn't have our degrees. We've both "had back" every penny we spent on our college education . . . many, many, many times over.
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FAFSA qualifies you for grants and certain types of federal loans based on your income. Subsidized Stafford loans do not accrue interest while the student is in school, including graduate/professional school, which is a huge benefit. You're not eligible for them if your income is above a certain amount.
You also can't take out federal loans (even unsubsidized ones) without filling out the FAFSA. So, you'd have to go to a private loan company and deal with significantly higher interest rates and less repayment options and other benefits (some private loans do not discharge upon the student's death for example).
EDIT: Plus, the only borrower listed on a federal loan is the student, regardless of credit score or employment. If you get a private loan, and the student can't qualify, they must have a co-signer. Many parents/relatives are rightfully wary of putting themselves in that situation.
Grants/scholarships/etc. are not a realistic expectation in my experience as if you are employed, white, or male you are not eligible... Not worth wasting time that could be spent earning money if you are all three. Regarding interest rates, all my private loans are at lower interest rates than the two government loans I have. Government loans will be paid off this year, private loans will take a while. Private is really a silly term though as they're all effectively government loans given the government backing and regulation/laws. I'm a little surprised the topic of taking out student loans came up on this forum, as it's spending beyond your means analogous to borrowing for a fancy new luxury car (potentially every year for several years) or other frivolous purchase. Sure it's fine if you have the money and value that, but most 18-20 year olds don't have that amount of money.
Obviously a n=1 case, but as an employed, white male (not sure how race is a factor on the FAFSA), I got a decent chunk of grant money for undergrad (2002-2007). In fact, the first 2 years at community college, everything was covered by grants and I got a check for 3-5K back, depending on the number of credit hours and cost of books.
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My now-wife was told by the college that work study was mandatory when offered, and conveniently for the college work study paid less than other nearby jobs.
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After reading this thread, it seems that owning rental properties is not a good place to have your money invested when filling out the FAFSA. Can anyone tell me which part of owning rental property hurts your chances for financial aid the most? Is it the value of the real estate? (appraised value - mortgage)? or is it the income generated from rents? Would it make sense to open credit lines on rental property to pay down primary residence mortgage?
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Something I recently learned about 529s (it's possible I'm wrong about this, but I'm fairly confident about the conclusions here):
529s shield your income. Income is assessed at a rate that is much higher than assets (the top bracket for income is 20% or so, I can't recall exactly. The point is it is significantly higher than the top rate of 5.64% that your assets are assessed at).
So if you have dividend income from your assets, you are assessed on both the asset balance and the dividend income. If you have long term capital gains, the LTCG is assessed as income (and again, the assets you sold were previously assessed as assets).
So income from assets effectively gets assessed twice: once on the asset balance itself, and then again as income when you receive dividends and/or sell.
However, suppose you have a 529 with you as the custodian (where we'e not talking about having grandparents opening a 529). There can never be any income from the 529, even the 529 withdrawals. It is only ever assessed as an asset.
I believe this is correct, and if not, please correct me!
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Just posting so I can follow.
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However, suppose you have a 529 with you as the custodian (where we'e not talking about having grandparents opening a 529). There can never be any income from the 529, even the 529 withdrawals. It is only ever assessed as an asset.
This is true only for qualified expenses:
https://www.edvisors.com/plan-for-college/saving-for-college/529-college-savings-plans/financial-aid/
But yes, this is a great benefit of 529s. We are putting away a significant amount of money for out kids in 529s.
As you alluded, distributions from a grandparent owned 529 are included on FAFSA as untaxed income to the student. But this is not a problem after the last FAFSA is submitted mid junior year and could be used for funding 1.5 years worth of college. Actually, this could be a great option for families with multiple kids since it is not included as parental income and will not affect the siblings' FAFSA assessment.
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However, suppose you have a 529 with you as the custodian (where we'e not talking about having grandparents opening a 529). There can never be any income from the 529, even the 529 withdrawals. It is only ever assessed as an asset.
This is true only for qualified expenses:
https://www.edvisors.com/plan-for-college/saving-for-college/529-college-savings-plans/financial-aid/
Haha yea I made that implicit assumption.
As you alluded, distributions from a grandparent owned 529 are included on FAFSA as untaxed income to the student. But this is not a problem after the last FAFSA is submitted mid junior year and could be used for funding 1.5 years worth of college. Actually, this could be a great option for families with multiple kids since it is not included as parental income and will not affect the siblings' FAFSA assessment.
Emphasis mine.
I didn't cover the first part because I thought it had been mentioned earlier, but I didn't bother to check.
But the bolded part, I was not aware of! That result is kind of bizarre. But I guess it sort of makes sense too - the 529 distribution from the grandparent is counted as the kid's income, right? And the kid isn't expected to contribute to his or her sibling's expenses.
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Non-Education IRAs is all that you need. If you are doing a Roth IRA conversion to pay for your expenses, you are flat broke as far as financial aid is concerned.
That awesome. I hope they don't change that in the next 20ish years.
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Can anyone tell me which part of owning rental property hurts your chances for financial aid the most?
It's not the value of the property or the equity, it's the part where you can't file a 1040A anymore. So you pretty much can't own rental property at all.
Only people who can file a 1040 (not a 1040A) and can show low enough income are eligible for the simplified FAFSA accounting process that excludes assets. If you file a schedule E you're out of luck.
See for more details: http://www.finaid.org/educators/needs.phtml
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Non-Education IRAs is all that you need. If you are doing a Roth IRA conversion to pay for your expenses, you are flat broke as far as financial aid is concerned.
That awesome. I hope they don't change that in the next 20ish years.
Did you read post #43? You may be flat broke as far as the IRS is concerned, but the FAFSA adds back untaxed income. I'm glad someone pointed it out to me before I tried it, but it is back to the drawing board for financial plans while DS5 is in college.
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I have been mulling over this topic quite a bit over the past couple weeks. I'm not quite ready to unveil a master plan, but I had a few thoughts I wanted to record here.
It seems to me the hard part of paying for college after retiring early is not saving enough money for college. I have plenty of excess income to shove into 529 plan accounts. The problem is avoiding being penalized (unfairly, in my opinion) for early retirement compared to those who retire after 59.5 and have easy access to their retirement accounts. The early retiree has to have lots of taxable investments or jump through hoops to access retirement accounts, both of which negatively impact EFC.
IRAs can apparently be tapped for higher education expenses without the 10% early withdrawal penalty. I've heard a lot of talk about using Roth IRAs for the last 1.5 years of school, after the last FAFSA is submitted, so as not to appear as income on FAFSA. I don't hear as much about using traditional IRAs in the same capacity, probably because tIRAs are taxable, but this may not be as much of a problem for Mustachians in low income tax brackets. 15% tax may be preferable to having an equivalent amount of money in a taxable investment account assessed on FAFSA at 5.6% year after year after year (in my case, 10 years spread across 3 kids). This may be important for those trying to preserve viability of a Roth pipeline considering both legs of the pipeline are considered income by FAFSA (see reply #28 in this thread).
Another way to tap the tIRA account directly (without the double-counting effected by the Roth pipeline) is a SEPP 72(t) withdrawal. I don't like the lack of flexibility -once you start withdrawals, you can't stop without penalty until age 59.5. But in my spreadsheet calculations so far, this is the option that requires the least initial savings in taxable investments and 529 plan accounts, and the smallest cumulative EFC. Still brainstorming, though.
One other thing that might fit into a financial aid strategy is continuing to make Roth contributions even while paying for college. Shoveling taxable investments into a shielded account that you can still (partly) tap at need is one way to reduce assets visible to FAFSA. I'm still thinking about whether that hurts more in the long run since pulling it back out again counts as "income". But again, this may help preserve the viability of a Roth pipeline for after the college years.
Hmmm. Just some things to think about.
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More late night/early morning thoughts!
A big part of my financial aid strategy is staying under the FAFSA income exclusion amount. Above that amount, any income is assessed at 40% toward your EFC. (ETA: Actually, it's 22% to 47% on a progressive scale.) Seems like a bad deal to me! To avoid this I plan to fund part of my annual living expenses by selling off taxable investments - only the capital gains portion is assessed as income. But - in order to minimize the capital gains during college years, it seems prudent to me to "reset" the basis of the investments (i.e. sell off & then buy similar assets) to push capital gains into the tax year before the first year "seen" by FAFSA.
The stockpile of taxable investments itself is also assessed by FAFSA, albeit at the lower 5.6% rate. But in my situation (10 years of college to fund!) that rate adds up. One obvious way to reduce the needed stockpile is to reduce annual living expenses. It occurred to me this could be done by prepaying certain expenses. A great example that comes to mind is religious organization fees (or a tithe, if that's how you roll). I bet my synagogue would be willing to accept prepayment of 10 years worth of membership fees & religious school tuition. I whipped up a quick spreadsheet calculation.
Assumptions:
$3000 annual religious expenses, growing 2.7% annually (average inflation)
Investment would grow at 7% annually
Remaining investment balance assessed by FAFSA at 5.64% annually - expense added to my EFC
Result:
It would take a starting stockpile of $35,400 (including the effect on EFC) to fund a 10-year expense with current value of $30,000.
This doesn't even take into account the volatility of the stock market. Ideally, if I could predict the stock market, I would start with a stockpile of a certain size and burn it down to 0 at the end of the 10 years (assuming I can go back to using my Roth pipeline afterward). But given stock market volatility, I would probably choose to start with a larger stockpile than strictly needed in order to make sure I have enough. That translates into even more EFC $$$.
A bonus for this particular case is that some portion of my religious expenses is tax deductible if I itemize, which I wouldn't normally be able to with $3000 annual expenses but could with this large prepayment. This could be used to help offset the aforementioned capital gains "reset".
I wonder what other expenses could potentially be prepaid? I can't (and wouldn't want to) prepay everything, but prepayment seems valuable up to a point.
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Your mortgage is the other obvious one.
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Your mortgage is the other obvious one.
Good point. I take that one for granted because I plan to pay off the mortgage when I retire.
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More late night/early morning thoughts!
A big part of my financial aid strategy is staying under the FAFSA income exclusion amount. Above that amount, any income is assessed at 40% toward your EFC. Seems like a bad deal to me! To avoid this I plan to fund part of my annual living expenses by selling off taxable investments - only the capital gains portion is assessed as income. But - in order to minimize the capital gains during college years, it seems prudent to me to "reset" the basis of the investments (i.e. sell off & then buy similar assets) to push capital gains into the tax year before the first year "seen" by FAFSA.
The stockpile of taxable investments itself is also assessed by FAFSA, albeit at the lower 5.6% rate. But in my situation (10 years of college to fund!) that rate adds up. One obvious way to reduce the needed stockpile is to reduce annual living expenses. It occurred to me this could be done by prepaying certain expenses. A great example that comes to mind is religious organization fees (or a tithe, if that's how you roll). I bet my synagogue would be willing to accept prepayment of 10 years worth of membership fees & religious school tuition. I whipped up a quick spreadsheet calculation.
Assumptions:
$3000 annual religious expenses, growing 2.7% annually (average inflation)
Investment would grow at 7% annually
Remaining investment balance assessed by FAFSA at 5.64% annually - expense added to my EFC
Result:
It would take a starting stockpile of $35,400 (including the effect on EFC) to fund a 10-year expense with current value of $30,000.
This doesn't even take into account the volatility of the stock market. Ideally, if I could predict the stock market, I would start with a stockpile of a certain size and burn it down to 0 at the end of the 10 years (assuming I can go back to using my Roth pipeline afterward). But given stock market volatility, I would probably choose to start with a larger stockpile than strictly needed in order to make sure I have enough. That translates into even more EFC $$$.
A bonus for this particular case is that some portion of my religious expenses is tax deductible if I itemize, which I wouldn't normally be able to with $3000 annual expenses but could with this large prepayment. This could be used to help offset the aforementioned capital gains "reset".
I wonder what other expenses could potentially be prepaid? I can't (and wouldn't want to) prepay everything, but prepayment seems valuable up to a point.
Lots of interesting ideas to explore!
I'm curious how you arrived at the 40% figure I bolded above. The relevant table in the FAFSA EFC calculation booklet appears to be progressive, like fed income tax rates, starting at 22% and rising in steps to 47%.
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More late night/early morning thoughts!
A big part of my financial aid strategy is staying under the FAFSA income exclusion amount. Above that amount, any income is assessed at 40% toward your EFC. Seems like a bad deal to me! To avoid this I plan to fund part of my annual living expenses by selling off taxable investments - only the capital gains portion is assessed as income. But - in order to minimize the capital gains during college years, it seems prudent to me to "reset" the basis of the investments (i.e. sell off & then buy similar assets) to push capital gains into the tax year before the first year "seen" by FAFSA.
The stockpile of taxable investments itself is also assessed by FAFSA, albeit at the lower 5.6% rate. But in my situation (10 years of college to fund!) that rate adds up. One obvious way to reduce the needed stockpile is to reduce annual living expenses. It occurred to me this could be done by prepaying certain expenses. A great example that comes to mind is religious organization fees (or a tithe, if that's how you roll). I bet my synagogue would be willing to accept prepayment of 10 years worth of membership fees & religious school tuition. I whipped up a quick spreadsheet calculation.
Assumptions:
$3000 annual religious expenses, growing 2.7% annually (average inflation)
Investment would grow at 7% annually
Remaining investment balance assessed by FAFSA at 5.64% annually - expense added to my EFC
Result:
It would take a starting stockpile of $35,400 (including the effect on EFC) to fund a 10-year expense with current value of $30,000.
This doesn't even take into account the volatility of the stock market. Ideally, if I could predict the stock market, I would start with a stockpile of a certain size and burn it down to 0 at the end of the 10 years (assuming I can go back to using my Roth pipeline afterward). But given stock market volatility, I would probably choose to start with a larger stockpile than strictly needed in order to make sure I have enough. That translates into even more EFC $$$.
A bonus for this particular case is that some portion of my religious expenses is tax deductible if I itemize, which I wouldn't normally be able to with $3000 annual expenses but could with this large prepayment. This could be used to help offset the aforementioned capital gains "reset".
I wonder what other expenses could potentially be prepaid? I can't (and wouldn't want to) prepay everything, but prepayment seems valuable up to a point.
Lots of interesting ideas to explore!
I'm curious how you arrived at the 40% figure I bolded above. The relevant table in the FAFSA EFC calculation booklet appears to be progressive, like fed income tax rates, starting at 22% and rising in steps to 47%.
Yup.
In very many ways the EFC operates like a tax on assets and income, with certain types of assets excluded and a different definition of income from that of the IRS.
In effect, if your child is receiving financial aid, your marginal tax rate is more than the sum of the federal and state marginal rates.
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Can anyone tell me which part of owning rental property hurts your chances for financial aid the most?
It's not the value of the property or the equity, it's the part where you can't file a 1040A anymore. So you pretty much can't own rental property at all.
Only people who can file a 1040 (not a 1040A) and can show low enough income are eligible for the simplified FAFSA accounting process that excludes assets. If you file a schedule E you're out of luck.
See for more details: http://www.finaid.org/educators/needs.phtml
I've just been looking into this and what I read seems to show that if the rental property is held in an LLC (title owned by the LLC also) it can be excluded under the small business exclusion.
http://www.finaid.org/fafsa/smallbusiness.phtml
If the business is incorporated (e.g., C corporation, S corporation, LLC), the "significant services" requirement does not generally apply. Incorporating the business avoids many questions about whether it really is a business or not. However, the rental property must be owned by the business in order to be excluded, as the small business exclusion only applies to the business and its assets.
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Our son went in the military and the government paid for his college. He also got a great education while being in. He had to sign up for 5 years, was trained in satellite/microwave repair. He was in 10 years, now is a supervisor in the DOD, has a good job, pays well.
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I'm curious how you arrived at the 40% figure I bolded above. The relevant table in the FAFSA EFC calculation booklet appears to be progressive, like fed income tax rates, starting at 22% and rising in steps to 47%.
Thank you for catching my error. To be honest, I was working from memory. 40% was probably my marginal assessment rate when I use to think DH and/or I would be working while sending the kids to college. I'll add a note to my post above.
22% isn't great, but it's not as bad as 40%! That may shift my strategy slightly in favor of the "income" side of things for later years.
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More late night/early morning thoughts!
A big part of my financial aid strategy is staying under the FAFSA income exclusion amount. Above that amount, any income is assessed at 40% toward your EFC. Seems like a bad deal to me! To avoid this I plan to fund part of my annual living expenses by selling off taxable investments - only the capital gains portion is assessed as income. But - in order to minimize the capital gains during college years, it seems prudent to me to "reset" the basis of the investments (i.e. sell off & then buy similar assets) to push capital gains into the tax year before the first year "seen" by FAFSA.
The stockpile of taxable investments itself is also assessed by FAFSA, albeit at the lower 5.6% rate. But in my situation (10 years of college to fund!) that rate adds up. One obvious way to reduce the needed stockpile is to reduce annual living expenses. It occurred to me this could be done by prepaying certain expenses. A great example that comes to mind is religious organization fees (or a tithe, if that's how you roll). I bet my synagogue would be willing to accept prepayment of 10 years worth of membership fees & religious school tuition. I whipped up a quick spreadsheet calculation.
Assumptions:
$3000 annual religious expenses, growing 2.7% annually (average inflation)
Investment would grow at 7% annually
Remaining investment balance assessed by FAFSA at 5.64% annually - expense added to my EFC
Result:
It would take a starting stockpile of $35,400 (including the effect on EFC) to fund a 10-year expense with current value of $30,000.
This doesn't even take into account the volatility of the stock market. Ideally, if I could predict the stock market, I would start with a stockpile of a certain size and burn it down to 0 at the end of the 10 years (assuming I can go back to using my Roth pipeline afterward). But given stock market volatility, I would probably choose to start with a larger stockpile than strictly needed in order to make sure I have enough. That translates into even more EFC $$$.
A bonus for this particular case is that some portion of my religious expenses is tax deductible if I itemize, which I wouldn't normally be able to with $3000 annual expenses but could with this large prepayment. This could be used to help offset the aforementioned capital gains "reset".
I wonder what other expenses could potentially be prepaid? I can't (and wouldn't want to) prepay everything, but prepayment seems valuable up to a point.
Lots of interesting ideas to explore!
I'm curious how you arrived at the 40% figure I bolded above. The relevant table in the FAFSA EFC calculation booklet appears to be progressive, like fed income tax rates, starting at 22% and rising in steps to 47%.
Yup.
In very many ways the EFC operates like a tax on assets and income, with certain types of assets excluded and a different definition of income from that of the IRS.
In effect, if your child is receiving financial aid, your marginal tax rate is more than the sum of the federal and state marginal rates.
I hadn't thought to view this as an alternate tax system with different rules, good way to look at it. I'm also including EITC rules in our mix, with investment income limits and phaseout ranges and rates, which also change our marginal rates. No wonder it seems so complicated!
Another prepayment area is medical, thru funding an HSA. Pay medical expenses OOP now, reimburse yourself later, and have money set aside for future expenses. Unfortunately, this approach makes filing a 1040A impossible.
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Can anyone tell me which part of owning rental property hurts your chances for financial aid the most?
It's not the value of the property or the equity, it's the part where you can't file a 1040A anymore. So you pretty much can't own rental property at all.
Only people who can file a 1040 (not a 1040A) and can show low enough income are eligible for the simplified FAFSA accounting process that excludes assets. If you file a schedule E you're out of luck.
See for more details: http://www.finaid.org/educators/needs.phtml
I've just been looking into this and what I read seems to show that if the rental property is held in an LLC (title owned by the LLC also) it can be excluded under the small business exclusion.
http://www.finaid.org/fafsa/smallbusiness.phtml
If the business is incorporated (e.g., C corporation, S corporation, LLC), the "significant services" requirement does not generally apply. Incorporating the business avoids many questions about whether it really is a business or not. However, the rental property must be owned by the business in order to be excluded, as the small business exclusion only applies to the business and its assets.
No, that won't work. Scroll down a bit in the link you provided and you'll see that (residential) rental property cannot be excluded as a business. They treat it the same as the IRS, which is as a passive activity.
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Another prepayment area is medical, thru funding an HSA. Pay medical expenses OOP now, reimburse yourself later, and have money set aside for future expenses. Unfortunately, this approach makes filing a 1040A impossible.
The "simplified EFC" or "zero EFC" doesn't necessarily have to be an all or nothing thing. You could shove your non-1040A activities into alternating years. Eg sell stocks (or HSA reimbursement, or whatever) on Dec 31 of one year, spend the entire next tax year withdrawing only from rIRA, and then sell more stock starting on Jan 1 of the following year. You get a see-saw effect of small (or zero) EFC one year, then larger EFC the next.
My mom always thought it was better to start with a low EFC and go up from there. The idea was that the college would earmark a similar amount of aid for the following years (even if you didn't end up qualifying for it.) On the flip side, if you qualified for more aid in a subsequent year, they might not have any grants left over for you and you end up with loans. It makes sense, but that's just something my mom told me, I am not sure how much truth there is to it.
Anyway, the idea of skipping a year could work, and might not be a bad idea even if you can only make it work for the first year.
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Can anyone tell me which part of owning rental property hurts your chances for financial aid the most?
It's not the value of the property or the equity, it's the part where you can't file a 1040A anymore. So you pretty much can't own rental property at all.
Only people who can file a 1040 (not a 1040A) and can show low enough income are eligible for the simplified FAFSA accounting process that excludes assets. If you file a schedule E you're out of luck.
See for more details: http://www.finaid.org/educators/needs.phtml
I've just been looking into this and what I read seems to show that if the rental property is held in an LLC (title owned by the LLC also) it can be excluded under the small business exclusion.
http://www.finaid.org/fafsa/smallbusiness.phtml
If the business is incorporated (e.g., C corporation, S corporation, LLC), the "significant services" requirement does not generally apply. Incorporating the business avoids many questions about whether it really is a business or not. However, the rental property must be owned by the business in order to be excluded, as the small business exclusion only applies to the business and its assets.
No, that won't work. Scroll down a bit in the link you provided and you'll see that (residential) rental property cannot be excluded as a business. They treat it the same as the IRS, which is as a passive activity.
f the business is incorporated (e.g., C corporation, S corporation, LLC), the "significant services" requirement does not generally apply. Incorporating the business avoids many questions about whether it really is a business or not. However, the rental property must be owned by the business in order to be excluded, as the small business exclusion only applies to the business and its assets. The small business exclusion does not apply to assets that are managed by the business but not otherwise owned by the business. If the deed to the property is in the family's name, it is a personal asset and must be reported as an investment asset on the FAFSA. If the deed is in the name of the business, then it can be excluded on the FAFSA if the small business exclusion applies. For example, if the family owns a property which it rents to the business, that property is reported as an investment asset on the FAFSA because it is owned by the family, not the business.
Reading down the page, I found the bolded area. What am I missing?
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Time for some more musings from madamwittyTM on this topic:
I've been evaluating all sorts of scenarios and before I get into the details I thought I should make a few comments about the framework I'm using to evaluate the various options:
- I am committing to fund the entire EFC for all three of my kids. I expect the vast majority of the EFC to be based on my financial situation and I don't think it's fair to penalize them (i.e. make them pay) for my financial decisions. (Especially the decision to retire early where that has a negative effect on EFC.)
- In addition, I will not limit their choice of colleges to public colleges only. I benefitted greatly from attending a private college as compared to my public options and want them to have the same opportunities. This means I cannot count on the "simplified EFC" or "zero EFC" option working for us (although if it does, some years, that would be great!) Many private colleges include home equity in their asset evaluations; some limit this as a multiplier based on annual income, but some do not. I can't afford to cover unlimited home equity, but I think 2-3 times annual income (which is common) is doable.
- On the flip side, I can't guarantee that a particular college will provide full financial aid for everything other than EFC. I will encourage my kids not to pick a school with a gap or substantial loans in the aid package, but ultimately that will be their decision and their financial commitment.
- I have 10 years of college to fund over 3 kids, which means my funding plan has to be sustainable over a long timeframe and flexible to market conditions.
- I plan to save enough money in 529 Plan accounts to cover EFC (to prevent college funds being assessed as income). If I run out of 529 money, I can dip into an IRA in the last 1.5 years, after the last FAFSA is submitted. I might also have a 529 in grandparents' names for the last 1.5 years of DD1 and DS2. But actually I wouldn't be surprised if I end up with too much 529 money.
- Annual living expenses need to come out of Roth pipeline, SEPP 72(t) withdrawals, capital gains from taxable investments, or even earned income. (For planning purposes, earned income will be purely incidental for something I do out of enjoyment, and not counted on in my plans. In fact, unplanned/variable earned income kind of throws a wrench in my plans! But some amount is desirable in order to get certain tax credits.)
- I assume I can manipulate the starting amount in my taxable investment accounts to whatever I want (at a coarse level.) I am pretty sure this is true. I can either boost taxable savings in the years prior to retirement by foregoing 403(b) contributions, or I can spend down savings in my first couple years after retirement. I have yet to evaluate the impact to my Roth pipeline.
My conclusion:
The lowest EFC solutions I could come up with all involved SEPP 72(t) withdrawals. I suppose this makes sense upon reflection. Pulling directly from a retirement account reduces the amount taxable investments needed to cover living expenses, and avoids the "double counting" of income that applies to a Roth pipeline. SEPP withdrawals also lend themselves well to fitting within the constraints of the "simplified EFC" assessment - no 1040A required (I think?).
Now for an aside on the topic of SEPP withdrawals:
Even though SEPP withdrawal calculation is specified by the IRS, I can manipulate a SEPP withdrawal amount by splitting off a separate IRA with the proper account balance to get the annual withdrawal amount I want.
I mentioned before that I don't like the lack of flexibility, because distributions have to continue exactly as specified until age 59 and 1/2. For me that will be about 15 years from the time my kids start college! Ultimately, the problem comes if I start to have significant earned income and am being taxed at a higher marginal rate on my (now unneeded) SEPP withdrawals. Really, at that point additional earned income is something I do for the fun, not really for the profit. While unfortunate, taxes on the extra income are not going to change the fact that I will already be FI.
If too big of a SEPP annual withdrawal is a problem, there is a one-time opportunity to switch calculation methods to the "minimum withdrawal method". The minimum withdrawal method has the potential to reduce the annual withdrawal (depending on circumstances), e.g. after the kids are out of college. The minimum withdrawal method may not be a valid option for reducing the distribution if my IRA value has grown too much (not a bad problem to have!)
On the other side, you can have more than one SEPP withdrawal as long as they come from separate IRAs. So, I can start with a smaller SEPP withdrawal and add on a stream or two if necessary. I don't have to be committed initially to a large SEPP withdrawal. And for unexpected single-time event I could take a Roth withdrawal (despite its unfavorable effect on EFC.)
Does SEPP really help me address my goals?
The ultimate purpose of "maximizing financial aid" probably varies by person, so the appropriateness of a given method probably depends on context. Such goals might include, for example: sooner FI, decreasing risk of running out of funds in retirement, increasing money for fun in FI, or increasing money for bequests/inheritances after death.
I think my main goals are:
(1) don't run out of money in retirement (while maintaining a certain [Mustachian] standard of living), and
(2) pay for the kids' college.
I think using SEPP helps reduce risk of running out of taxable investments before age 59.5 by shrinking my dependence on a taxable account (even if I decrease the size of the account accordingly). DH and I will probably have a withdrawal rate of 3% in retirement so I am not concerned about after 59.5 when we get full access to our accounts. Long term use (15 years) of SEPP probably increases the risk of "non optimal" use of the money *if* I have earned income - but I guess I don't really see that as an issue.
I would love to hear from others on this board to see if this line of logic makes sense, or if I am overlooking something.
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Another side note:
One other thing that might fit into a financial aid strategy is continuing to make Roth contributions even while paying for college. Shoveling taxable investments into a shielded account that you can still (partly) tap at need is one way to reduce assets visible to FAFSA. I'm still thinking about whether that hurts more in the long run since pulling it back out again counts as "income". But again, this may help preserve the viability of a Roth pipeline for after the college years.
I always forget this can only happen if there is earned income. It occurred to me that main circumstance in which this would make sense is if the simplified EFC calculation is off the table (e.g. had to claim some capital gains anyway) and there is still room in the income exclusion for extra capital gains to be redirected to a Roth. Otherwise, it would be best to minimize income by not incurring unnecessary capital gains (especially if you're being assessed home equity based on a multiplier of income).
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Note that acceptance at many selective colleges is not need-blind. In other words, they look at whether you state you'll be applying for their financial aid when they make admissions decisions. In almost every selective college (not so much at the less competitive ones), they have far more qualified applicants than they can accept. For simplicity's sake, let's say there are 100 spots in the freshman class. So say they have 400 highly-qualified poor applicants and 400 highly-qualified rich applicants. And they have the funds to give financial aid to 35 students. They'll pick 35 students from the poor pool, and then they've run out of money, so they'll fill the rest of the class with 65 of the rich applicants. Wealth gives you a better chance at a spot. Just something to keep in mind. Once the student has been admitted, if their parents have to apply for financial aid later, of course their kid doesn't lose his/her spot.
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Here's a list full of schools that are completely need-blind. Note that it includes many very selective colleges and Universities.
https://www.edvisors.com/plan-for-college/college-admissions/need-blind-admissions/
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Note that acceptance at many selective colleges is not need-blind.
Thank you for pointing this out. I suppose one of my key unstated strategies for maximizing financial aid is to apply to at least some need blind schools :-)
Here's a list full of schools that are completely need-blind. Note that it includes many very selective colleges and Universities.
https://www.edvisors.com/plan-for-college/college-admissions/need-blind-admissions/
Great link! I agree there are many great need-blind schools out there. I went to one of the schools on the list (and I assure you all it was very selective).
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Note that acceptance at many selective colleges is not need-blind.
Thank you for pointing this out. I suppose one of my key unstated strategies for maximizing financial aid is to apply to at least some need blind schools :-)
Here's a list full of schools that are completely need-blind. Note that it includes many very selective colleges and Universities.
https://www.edvisors.com/plan-for-college/college-admissions/need-blind-admissions/
Great link! I agree there are many great need-blind schools out there. I went to one of the schools on the list (and I assure you all it was very selective).
IME the *most* selective schools are often also the wealthiest (ie, have the largest endowments) and thus some of the most likely to be need-blind. It's actually second tier (and lower) schools that have to make sure that they accept enough students who can pay more in order to ensure that they collect enough in tuition to stay a-float.
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Can anyone tell me which part of owning rental property hurts your chances for financial aid the most?
It's not the value of the property or the equity, it's the part where you can't file a 1040A anymore. So you pretty much can't own rental property at all.
Only people who can file a 1040 (not a 1040A) and can show low enough income are eligible for the simplified FAFSA accounting process that excludes assets. If you file a schedule E you're out of luck.
See for more details: http://www.finaid.org/educators/needs.phtml
I've just been looking into this and what I read seems to show that if the rental property is held in an LLC (title owned by the LLC also) it can be excluded under the small business exclusion.
http://www.finaid.org/fafsa/smallbusiness.phtml
If the business is incorporated (e.g., C corporation, S corporation, LLC), the "significant services" requirement does not generally apply. Incorporating the business avoids many questions about whether it really is a business or not. However, the rental property must be owned by the business in order to be excluded, as the small business exclusion only applies to the business and its assets.
No, that won't work. Scroll down a bit in the link you provided and you'll see that (residential) rental property cannot be excluded as a business. They treat it the same as the IRS, which is as a passive activity.
f the business is incorporated (e.g., C corporation, S corporation, LLC), the "significant services" requirement does not generally apply. Incorporating the business avoids many questions about whether it really is a business or not. However, the rental property must be owned by the business in order to be excluded, as the small business exclusion only applies to the business and its assets. The small business exclusion does not apply to assets that are managed by the business but not otherwise owned by the business. If the deed to the property is in the family's name, it is a personal asset and must be reported as an investment asset on the FAFSA. If the deed is in the name of the business, then it can be excluded on the FAFSA if the small business exclusion applies. For example, if the family owns a property which it rents to the business, that property is reported as an investment asset on the FAFSA because it is owned by the family, not the business.
Reading down the page, I found the bolded area. What am I missing?
Here it is, about halfway down in the link you included. The bottom line is that residential rental property will NOT be excluded, regardless of how it is owned/titled (unless it is somehow used in a business that provides actual services):
Rental Property
"Occasionally a family will try to characterize a rental property as a small business in order to have it excluded as an asset on the FAFSA. For example, the family might own a vacation home which they rent when they aren't using it themselves.
This situation is addressed in a margin note on page AVG-19 of the 2006-2007 Application and Verification Guide:
At times a student or parent will claim rental property is a business. Generally, it must be reported as real estate instead. A rental property would have to be part of a formally recognized business to be reported as such, and it usually would provide additional services like regular cleaning, linen, or maid service.
This note mirrors the language from "How To Report Rental Income and Expenses" on page 16 of IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes). This section of Publication 527 discusses whether rental income is reported on Schedule E or on Schedule C or Schedule C-EZ of IRS Form 1040. In order to file Schedule C or Schedule C-EZ, the taxpayer must "provide significant services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service". It continues "Significant services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc.".
Note that the verification guide is not merely saying that the type of schedule filed indicates whether the rental property is a business asset or not, but rather referring to the same underlying criteria. So while Schedule C or Schedule C-EZ can be an indication of a business, college financial aid administrators will examine the schedule looking for signs of "significant services" besides basic utilities. They may also want to see evidence that the family is treating it as a business, such as registration with the local municipality and the state, an employer identification number (EIN), a fictitious name registration, a separate business checking account and so on. It is not just which schedule was filed, but whether the taxpayer was entitled to file that schedule.
On the other hand, if the rental income is reported on Schedule E, it is always reported as an investment asset on the FAFSA. Personal use of the rental property (e.g., as a vacation home) or minimal rental use would also tend to indicate that the rental property is not a business asset. "
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I know this is an old topic, but I was drafting my 2015 tax returns and thought of something. Does the 1040A allow you to claim the foreign tax credit? If you have international funds that issue dividends, then it is (as far as I understand it) guaranteed that you will qualify for the foreign tax credit.
Well one of the conditions of using the 1040A is
The only credits you are claiming are the credit for child and dependent care expenses, the credit for the elderly or the disabled, education credits, the retirement savings contributions credit, the child tax credit, the additional child tax credit, the earned income credit, and/or the premium tax credit, and
Meaning if youre are claiming the foreign tax credit (and I'm sure there are more that weren't listed above), you cannot file the 1040A, which would disqualify you from the simplified FAFSA formulas that ignore assets.
But it says claim. Not qualify to claim. So I'm pretty sure you could just not claim the foreign tax credit and still qualify for the 1040A.
(This is an old thread and I'm sure it's been mentioned before, but as a side note you cannot have any sales of assets that result in capital gains/losses - such as stocks and mutual funds - because that would force you to file schedule D which is only allowed on the 1040. However, the 1040A does allow for dividends and capital gains distributions, which can lead to an interesting incentive - you may want to consider switching some of your stock funds to ones that yield higher dividends. Just be careful not to let the FAFSA tail wag the dog.)
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Interesting! Thanks for pointing this out.