Keeping assets in family-owned business to beat FAFSA for financial aid

BrodyInsurance said:   Unfortunately, we do have a system where the responsible people subsidize the irresponsible.

Or maybe a system where the stupid people subsidize the smart?

My kid is pretty young so I have a good number of years left to plan, but I'm kind of dismayed also that if I'm an aggressive saver now, the system will just penalize me later on. I'm actually interested in retiring early so we're pretty frugal around the house, and hope that by the time the munchkin goes to college, my wife and I will be drawing non-wage income only. I can't predict how the FAFSA will change so I'm not making any major moves yet, but if you have suggestions on what a good ten-fifteen year planning strategy would be, it'll give me something to look into.

prints said:   My kid is pretty young so I have a good number of years left to plan, but I'm kind of dismayed also that if I'm an aggressive saver now, the system will just penalize me later on. I'm actually interested in retiring early so we're pretty frugal around the house, and hope that by the time the munchkin goes to college, my wife and I will be drawing non-wage income only. I can't predict how the FAFSA will change so I'm not making any major moves yet, but if you have suggestions on what a good ten-fifteen year planning strategy would be, it'll give me something to look into.

Do:
- Max out your 401k, Roth and HSA. In the parent's names and those of the children. (To the extent legally allowable, of course)
- Do count on spending a fair amount of your child's middle school years learning (and if you have the impediment of being intensely logical, relearning) the college fin aid game, as then currently played
- Do have your plan in place by Christmas of your oldest child's 8th grade year
- If you have more than one child, think strategically about how and when they go to college
- Do consider spending down any 529s BEFORE Jan 1 of your child's senior year of high school.

Don't:
- Over contribute to 529s, especially 529s that do not have some sort of sweetener
- Keep money in 529s any longer than is necessary to accomplish your goals. In Illinois, that's 10 days.
- Do anything illegal. At the very least, it's unnecessary
- Put more money into any one savings vehicle than you can unwind in 5 years

BEEFjerKAY said:   prints said:   My kid is pretty young so I have a good number of years left to plan, but I'm kind of dismayed also that if I'm an aggressive saver now, the system will just penalize me later on. I'm actually interested in retiring early so we're pretty frugal around the house, and hope that by the time the munchkin goes to college, my wife and I will be drawing non-wage income only. I can't predict how the FAFSA will change so I'm not making any major moves yet, but if you have suggestions on what a good ten-fifteen year planning strategy would be, it'll give me something to look into.

Do:
- Max out your 401k, Roth and HSA. In the parent's names and those of the children. (To the extent legally allowable, of course)
- Do count on spending a fair amount of your child's middle school years learning (and if you have the impediment of being intensely logical, relearning) the college fin aid game, as then currently played
- Do have your plan in place by Christmas of your oldest child's 8th grade year
- If you have more than one child, think strategically about how and when they go to college
- Do consider spending down any 529s BEFORE Jan 1 of your child's senior year of high school.

Don't:
- Over contribute to 529s, especially 529s that do not have some sort of sweetener
- Keep money in 529s any longer than is necessary to accomplish your goals. In Illinois, that's 10 days.
- Do anything illegal. At the very least, it's unnecessary
- Put more money into any one savings vehicle than you can unwind in 5 years

Helpful? Yes.

Appreciated? Yes.

More serious than we're used to? Yes.

So in the spirit of that thought....

Pics? (of the black book of secrets of the system that Spock wouldn't approve of)

arktc said:   SUCKISSTAPLES said:   Beef can you send me the cliff notes ( I have no need, but my gf is attending Harvard grad school and I'm very outdated in my college loan gaming knowledge - I seem to recall rules differ for ppl over 25)

Grad schools don't always operate in the same way, especially since they assume that many people should get loans on their own. Ivy League grad schools can give merit aid, unlike Ivy League undergrad programs, for example. That's not to say there aren't things you can do nonetheless, but it's less likely to work in all cases.

You shouldn't have to pay tuition for grad school...even at Harvard. Well, I'll make an exception for HBS. Enroll in a funded PhD program and then leave early with a master's if so inclined. Alternatively, get a job at Harvard and then use the tuition benefit to take courses.

nebraskacornhusker said:   Schools with large endowments ...

As is so often the case, it's good to be well-endowed.

nebraskacornhusker said:   Schools with large endowments are moving towards a flat discount. By that, I mean that students below a certain EFC are allowed to attend school fee-free. Usually they have to pay for books and things like that. Ivy-Leagues and similar are headed this direction.
A flat discount would be a school that discounts tuition substantially below their peers such that it is a bargain to go there for everyone, regardless of their income. Rice in the 90s and early 2000s was one such example.
Allowing students with sub 60K household income to attend for free is basically a PR stunt to make the school look good. Most kids below the income limits would have had an EFC that would have only been 5-10% of the 50K tuition. So instead of charging them 5,000 you instead let them come for free which is a relatively small cost to make the school look good. Meanwhile you can raise tuition for everyone else by a couple thousand to offset this.

biomedeng said:    Not saying cheating is right, but when you self-provide information that isn't readily verifiable, how many people are actually being honest?

They don't need to satisfy the same burden of proof as would be required in a court of law. They can yank the aid and put it back on you to appeal.

If you aren't prepared to provide all potentially necessary forms of verification, don't play the game.

One of the keys to the game is being meticulously honest.

edit: All you folks pm'ing me about using RE as a dodge are way off in the sticks. And not just because I think residential RE is dead money for another 10-15 years.

Also, there have been recent, well-publicized cases schools successfully clawing back the financial aid post graduation when they could prove the fin aid application was fraudulent.

arktc said:   BEEFjerKAY said:   arktc said:   Income is income and assets are assets, regardless of whether it's a business or something else.

Wrong. Nothing could be further from the truth.

Financial aid is a contact sport. Choosing not to play the game does not equate to winning.

Please explain how it's wrong. If you are drawing income from something, whether it's a business or something else, it's income. If you have an asset, whether it's a house, a bank account, or a share of a business, it's an asset.

As I mentioned, there are certainly sophisticated ways of dealing with all of this, which probably require professional advice. I won't go beyond that.

It's wrong because it isn't about income and assets. It is about countable income and countable assets.

Here is a quick example:
Jim has $50,000 in his checking account. He puts $5,000 into his IRA. He pays off $45,000 of his mortgage. His assets are the same. His countable assets just dropped by $50,000 for FAFSA.

prints said:   My kid is pretty young so I have a good number of years left to plan, but I'm kind of dismayed also that if I'm an aggressive saver now, the system will just penalize me later on. I'm actually interested in retiring early so we're pretty frugal around the house, and hope that by the time the munchkin goes to college, my wife and I will be drawing non-wage income only. I can't predict how the FAFSA will change so I'm not making any major moves yet, but if you have suggestions on what a good ten-fifteen year planning strategy would be, it'll give me something to look into.

Just get the kid emancipated. Arrange a marriage or ship it off to the Army.

BrodyInsurance said:   

If you are going to do something in a grandparent's name, it doesn't have to be in a 529 or something similar. It is grandma's asset and is uncounted. This creates two problems.

1)It is grandma's money and she can do anything that she would like with the money.
2)Using this to pay for school will negatively impact aid the following year.

True, but if you can't trust grandma, you might have more problems that just financial aid.

Here's a rough idea for xfering some assets to a 529 to grandma, starting a year or so before you fill out aid forms that I think might be fool-proof for at least ONE year of aid:

1. Gift grandma money via check. You can do up to $12k/year, spouse can do same without needing to report.

2. Grandma appreciates the gift, but she decides to establishes a 529, with yourself (or really anyone except your kids) as the listed beneficiary.

3. Grandma also lists yourself/wife as the successor (in case Grandma dies, giving you assets upon death in worst case, but not a legal stake in ownership until then).

4. For any financial aid forms, these assets are clearly NOT yours and your kids are NOT the beneficiaries-- since Grandma can change these at will, what is listed is not binding and future intentions unknown.

5. For Senior year in college, once aid is set, Grandma "unknown to you", decides to change beneficiary to your kid, and funds can be withdrawn. The payment of funds in your kid's name would likely trigger more assets in the next year's aid formula, but that's not a problem now that hopefully he'll graduate.

If you have grandpa you can trust as well, you can double up the gifting if needed, or list him as the successor ahead of yourself to keep the assets with the folks. Although with one year of college as the target for the 529s, just a couple years of joint gifting to grandma with a spouse may be enough.

You could also bypass the 529 just to get the assets out of your name, but I'd worry more about getting the funds back cleanly in probate (if you have a lot of siblings) or if grandma remarried. With the 529, grandma really doesn't have to do anything other than potentially change a beneficiary later. Having the beneficiary and successor listed on a 529 may be "safer" intra-family.

***

Now, if you wanted to go REAL long-ball, perhaps you could gift sizable assets to grandma to help her out, and she decided unknown to you to fund a 529 with successor/beneficiary info above. Maybe grandma "forgot" to use the funds, but the kid got better aid as a result. Grandma decides to liquidate the funds (or you inherit it later), and simply pays the 10% penalty and ordinary income tax on earnings. Maybe grandma feels bad and decides to gift some of this money back. Not good from an investment hit, but maybe it turned out better than the asset formula a college would have used.

allegro54 said:   No matter what a family's assets are, if they have significant assets, their income will probably disqualify their kids. And you can't hide income.

My youngest only has two years of college under her belt, but she's going back in January (her 24th birthday). That means that our income won't be counted--that's not why she waited, but it's a great perk. She didn't go to school this year and won't be claimed as a dependent.

An old boyfriend of hers actually got married to get financial aid. His parents wouldn't pay for his college (he did get his associates at a junior college) and the only way he could get financial aid before he was 24 was to get married.

He told her he was marrying a platonic friend, and that they were both doing it just to get financial aid....

But they're still together.

It's not easy to "hide income", but you still provided an example of how planning can help qualify for aid, sometimes regardless of income.

I met a couple that got married after a dating a couple months. One didn't qualify for aid because of parent's high income. Parent's provided a place to live, but expected baby sitting, cleaning, a strict curfew, otherwise have complete control over 'child', and of course be responsible for paying own tuition and fees associated with going to school. Others parents didn't help at all.
The FAFSA expects a certain amount of help from parents. Students that are lucky enough to have parents help often times have to take what help they can get. I.e. getting married was worth in their case, because they still got just as much support, except it was in the form of "cash" and didn't have strings attached.

The couple is still married now 8 years later.

Having a kid also lets you stop reporting parents income, however I wouldn't recommend it, as it's probably more hassle than it's worth.

Having a legitimate dependent might also be an easy way to avoid reporting parents income, but could have tax implications for certain dependents. I.e. You provide shared apt, etc that accounts for over 50% of your little brothers support. You qualify for Fafsa and claim brother on your taxes. However, parents can no longer claim you or your brother on their taxes. (Large tax break lost. Also brother still wouldn't qualify for aid)
Perhaps another arrangement would have less devastating tax consequences. For example a cousin or relative that has no one to claim them anyways. (Could be anyone, but there's a LOT of people you'd rather not live with. - Especially someone with low income, as needed in this situation.)

I noticed recently they added the option for "students unable to provide parental information", for student's with incarcerated / abusive parents or for student's that don't know the location of their parents. Seems like something anyone living on their own might be tempted to use. Anyone have any experience with proving similar non-support from parents?

really none of these things are worth doing just to try and avoid colleges charging you more for tuition. if you wanted to do them any way then for a select few it helps. The majority of people who can put money away into these "alternative investments" will have enough income or assets that do count that defeat the purpose outlined here. Sometimes the anger over the likely "unfairness of the system" of punishing the savers gets people to do things that arent really the best thing to do.

So then what does one do in a situation like mine?

Income - Slightly over $300K combined
3 kids ages of - 7 mo, 7 yrs, and 9yrs.
Have around $100K in two different 529s ($50K each)
Mortgage with $350,000 balance.

Can BEEF (or anyone else) point me in the right direction?

mikef07 said:   So then what does one do in a situation like mine?

Income - Slightly over $300K combined
3 kids ages of - 7 mo, 7 yrs, and 9yrs.
Have around $100K in two different 529s ($50K each)
Mortgage with $350,000 balance.

Can BEEF (or anyone else) point me in the right direction?

id just keep adding to the 529 plans. I would prioritized maxing out my 401k. ira, or other qualified plan and make sure the mortgage is on track with a low interest rate as well. I seriuosly doubt that someone is going to give you some serious break by gaming the system by the methods noted in this thread. I dont blame you if you try, just i doubt it is really going to work and be worth it. Im in a similar situation with good income and 3 kids only unfortunately closer to college age.

teammjs said:   BrodyInsurance said:   

If you are going to do something in a grandparent's name, it doesn't have to be in a 529 or something similar. It is grandma's asset and is uncounted. This creates two problems.

1)It is grandma's money and she can do anything that she would like with the money.
2)Using this to pay for school will negatively impact aid the following year.


True, but if you can't trust grandma, you might have more problems that just financial aid.

Here's a rough idea for xfering some assets to a 529 to grandma, starting a year or so before you fill out aid forms that I think might be fool-proof for at least ONE year of aid:

1. Gift grandma money via check. You can do up to $12k/year, spouse can do same without needing to report.

2. Grandma appreciates the gift, but she decides to establishes a 529, with yourself (or really anyone except your kids) as the listed beneficiary.

3. Grandma also lists yourself/wife as the successor (in case Grandma dies, giving you assets upon death in worst case, but not a legal stake in ownership until then).

4. For any financial aid forms, these assets are clearly NOT yours and your kids are NOT the beneficiaries-- since Grandma can change these at will, what is listed is not binding and future intentions unknown.

5. For Senior year in college, once aid is set, Grandma "unknown to you", decides to change beneficiary to your kid, and funds can be withdrawn. The payment of funds in your kid's name would likely trigger more assets in the next year's aid formula, but that's not a problem now that hopefully he'll graduate.


If you have grandpa you can trust as well, you can double up the gifting if needed, or list him as the successor ahead of yourself to keep the assets with the folks. Although with one year of college as the target for the 529s, just a couple years of joint gifting to grandma with a spouse may be enough.

You could also bypass the 529 just to get the assets out of your name, but I'd worry more about getting the funds back cleanly in probate (if you have a lot of siblings) or if grandma remarried. With the 529, grandma really doesn't have to do anything other than potentially change a beneficiary later. Having the beneficiary and successor listed on a 529 may be "safer" intra-family.

***

Now, if you wanted to go REAL long-ball, perhaps you could gift sizable assets to grandma to help her out, and she decided unknown to you to fund a 529 with successor/beneficiary info above. Maybe grandma "forgot" to use the funds, but the kid got better aid as a result. Grandma decides to liquidate the funds (or you inherit it later), and simply pays the 10% penalty and ordinary income tax on earnings. Maybe grandma feels bad and decides to gift some of this money back. Not good from an investment hit, but maybe it turned out better than the asset formula a college would have used.

I'd be careful with playing these kinds of games.

For instance, when you give grandma a $12,000 gift and then she turns around and opens up a 529 plan with her as the owner and you as the beneficiary, she has just made a $12,000 gift back to you. It doesn't pass the smell test. The beneficiary can't just be anybody. The beneficiary will need to be related to the person who eventually is going to be given the money. The beneficiary should be in the same generation.

A 529 plan isn't needed. It is fairly easy to move money and give it to grandma. There are two problems with this.

1)It becomes grandma's money. Unforeseen stuff happens and it doesn't necessarily have to be an issue of trusting grandma.
2)If money is used before the final year of college, it will impact future financial aid. Moving large amounts to grandma doesn't help if that money is actually needed to pay for college.

mikef07 said:   So then what does one do in a situation like mine?

Income - Slightly over $300K combined
3 kids ages of - 7 mo, 7 yrs, and 9yrs.
Have around $100K in two different 529s ($50K each)
Mortgage with $350,000 balance.

Can BEEF (or anyone else) point me in the right direction?

Raise kids with good grades and/or athletic ability. A school is going to need to want your kids to get much in the way of aid.

Your kids are too young to worry about ways to game the system because what works today may very well not work 9 years from now.

BrodyInsurance said:    Because grandma owns it, for FAFSA purposes, it is a non-counted asset. The problem is that grandma is paying for college.

Not true for CSS Profile. Grandparent 529s are counted assets under that formula.

If your child is a Junior in high school, you've got limited options as to what you can do. Not zero options, but at the same time not enough runway to implement some of the more effective strategies.

If your child is 6th grade or younger, it's too long between now and college to make any overweighting moves. Hedge your bets.

If your child is in 7th grade, start learning the CSS Profile and FAFSA rules and develop a rough plan.

By Christmas of 8th grade, have your revised plan in place. Start implementing some of that plan no later than the week after Christmas.

Most folks come to me after Christmas of their child's senior year of high school. they have one or more acceptance letters in hand and are only then are seeing what the total cost can be ... and are actively looking for ways to mitigate the costs. Very little to do by that point.

edit: I keep pounding away about the importance of the CSS Profile not just because it might well be what your little Buffy's schools asks for, but because it is much more sophisticated than the FAFSA. If you can game the CSS Profile you should have no problem gaming FAFSA. The reverse is not so true.

Besides, fin aid is a dynamic contact sport. The FAFSA evolves. Use the CSS Profile to hedge your bets on where the FAFSA might go.

<cue the obligatory Grezky puck quote>

I'm outa here and back to the sunny b&M world for a while. Have a great summer.

And don't do anything SiS wouldn't do.

luvbugium said:   My personal house will be paid off by the time my kids are in high school.

Another strategy I haven't seen anyone mention above is trying to maximize the aid by having all your kids in college at the same time.

The first is a very poor plan. CSS Profile looks at your equity in your primary residence (among other RE-related questions). Read the CSS Profile and you will get a real eye-opener in how people used to use RE to dodge college expenses.

The 2nd is an EXCELLENT strategy and one that I alluded to a few posts past when I mentioned strategic timing.

For those of you looking to have grandma keep your money safe, please pm me with her contact info. I like women that can pay their portion of the restaurant tab.