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As families go through the college admissions and financial aid process, I am often asked about what helps get more aid. I’m sure you’ve heard or seen the “advice” to hide money, take out a mortgage, don’t save in your kid’s name, and other tips. Yet, I’m sure you’ve heard the opposite of all of this as well.
It is true that assets do increase your Expected Family Contribution (EFC), or the number that colleges use to calculate your eligibility for need-based aid. So hiding your assets for financial aid purposes can reduce EFC. Still, the resulting EFC is often far higher than what most families expect. I hear the phrase “how can they think I can possibly afford this per year?” a lot.
What families should ask is, “Does reducing assets matter for financial aid?”
The financial aid formula to calculate EFC considers both income as well as assets. Each is treated differently in how much of each “counts.” Parental income is calculated on a sliding scale ranging between 22 percent and 47 percent, after adjustments and deductions. Student income is assessed at 50 percent after deductions.
Parental assets, on the other hand, are assessed at a 5.64 percent rate (for the Free Application for Federal Student Aid, 5 percent on the College Scholarship Service Profile form). Student assets are assessed at either a 20 percent rate (FAFSA) or 25 percent rate (CSS Profile).
What this means is that income is assessed at a far greater rate than assets. For many higher earning families ($200k and up), hiding assets means little or nothing, as the EFC is high primarily due to income.
Should you hide assets then? My honest answer is, “I don’t know”.
First, remember that everyone’s situation is different. What your neighbor said about their college costs and aid have nothing to do with your situation.
If you’re unlikely to get need-based aid / EFC is high:
- Hiding assets means nothing. To lower the cost of college, focus on obtaining merit scholarships either from the college itself or by applying to scholarships given by companies and local organizations.
- The other consideration would be on how and when to use the assets to pay for college. Here, gifting assets to your student may make sense to take advantage of lower income or capital gains tax rates. For example, if you own stock and were going to sell to pay for college, it may make sense to gift that stock to your student. Use loans to pay for college and then sell the stock after graduation at a far lower capital gains tax rate.
- In the event that you have extended family members (such as grandparents) who want to contribute to your student’s college bill, they can do so without worrying about impacting financial aid since you wouldn’t qualify anyway.
If you’re likely to get need-based aid / EFC is low:
- In this situation, hiding assets makes sense to lower EFC or at least prevent it from going higher. But this is a long term game. Since families fill out financial aid forms each year, you would need to keep your EFC low for all four years of college to maintain eligibility.
- The question is where to hide assets. For student assets, such as a bank account, the answer is easy – transfer into a parent account. For example, if the student has $100 in a bank account, that represents $20 towards EFC. Move that $100 to a parent bank account, only $5.64 counts towards EFC, and increase your aid eligibility by almost $20.
- What about parent assets? Understanding which assets count for financial aid and which don’t become key. Retirement accounts (IRAs, 401ks, etc.), cash value of life insurance and non-qualified annuities are all invisible for FAFSA purposes. The equity in your primary residence does not count for FAFSA, but does count for CSS Profile.
Please note that cash value of life insurance and annuities are sometimes considered on the CSS Profile form. Some schools specifically ask about the value of these assets. Thus, hiding assets this way doesn’t always work.
Some strategies that do work but are impractical include putting assets into trusts or gifting to relatives. In the case of trusts, if you or your student are either the trustee and/or beneficiary, then the asset still counts. Irrevocable trusts would be invisible for financial aid purposes, but it also means you’ve given away control of that asset.
Gifting assets to relatives ends up with the same result. Yes, any money given away would then be invisible for financial aid, but again, you’ve given away control. Further, depending on the amount, you and the recipient may be required to file a gift tax return and be subject to gift taxes.
And if you have a relative who wants to contribute to college costs, this can negatively impact aid eligibility. How they give the money and when they do so really matters here.
Overall, the answer is unique to your family. Before you start burying money in your backyard, under your mattress, or giving early holiday presents to relatives, figure out your EFC first, then figure out the strategy.
Jack Wang is CEO/Financial Wealth Strategist of Longhorn Financial LLC. His practice focuses primarily on helping regular families with college financial aid planning as well as retirement income planning, with a particular focus on helping business owners/self-employed. He, along with his wife and children, live in Westford. You can follow him on Facebook at www.facebook.com/longhornfin or on LinkedIn at https://www.linkedin.com/in/