College Planning – Can I Hide My Money Under a Mattress to Get Financial Aid?Submitted by Financial Planning Solutions, LLC on August 24th, 2017
While I don’t think I’ve ever had a client ask me this question exactly, they sometimes come close.
We try not to think of college in these terms because, as a parent, you are usually looking for the very best education that you can afford without spending every last cent of your retirement savings to do it. Hiding money seems a little nefarious.
The first place to start is to complete the FAFSA, or Free Application for Federal Student Aid—even if you don’t think you’re eligible. Colleges use the information on the FAFSA to determine your Expected Family Contribution (EFC) which is a measure of how much you will be expected to contribute towards college. It is also used determine if your son or daughter eligible for government student loans.
Last year, they moved up the FAFSA filing date to October 1st of your child’s senior year in high school. This allows families to get a head start on applying and eliminates the January 1st mad rush of years’ past.
So, which assets counted?
Retirement accounts – Your 401(k) and IRAs are not counted in determining your EFC. However, if you withdraw money from one of these accounts to pay for college, it will be counted on the FAFSA.
Equity in your home – The value of your home, less any mortgages equals your equity, or what you would net if you were to sell your home today and pay off your mortgage. This is not counted as an asset on the FAFSA.
Custodial accounts – Accounts such as UGMA/UTMAs are considered a student’s asset on the FAFSA. As such, 20% of these accounts is counted in the EFC calculation. In addition, interest, dividends or capital gains reported on the student’s tax return are counted. Student income is counted and assessed on the FAFSA at 50%.
Family businesses – For the most part, small family-owned businesses are protected. When more than 50% is owned and controlled by your family, and there are fewer than 100 full-time employees, the business is not counted as an asset on the FAFSA.
Insurance and annuities – While the cash values of whole life insurance and annuities are not reportable on the FAFSA, non-qualified (e.g., non-retirement) annuities are counted as assets on the CSS Profile, another financial form used by many private colleges to determine aid eligibility.
Stocks, bonds and mutual funds – Investments held in non-retirement accounts are counted on the FAFSA. Distributions from mutual funds, and dividends paid or capital gains reported on your tax forms are counted as income on the FAFSA.
College savings plans (529s) – Funds invested in a 529 and owned by a dependent student or parent are counted on the FAFSA as a parental asset, a more favorable treatment then if treated as a student asset. Up to 5.64% of parent assets are considered available to pay for college. In contrast, 20% student assets are considered. The greater the amount counted, the higher your EFC, and the lower the amount of financial aid you may receive.
If you have questions about how assets are treated for financial aid, give us a call. We’re here to help.
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