Pay-off mortgage before FAFSA?

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spartanswami
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Pay-off mortgage before FAFSA?

Post by spartanswami » Thu Sep 26, 2019 11:51 am

Since the primary home equity is not considered as asset for the FAFSA, should I pay-off my mortgage?

I'm already maxing out all tax deferred options for me and DW, 401Ks, backdoor Roths, so I will just be pausing post-tax investments to pay down the mortgage, approx 90K left at 3% (7yrs left on a 15yr fixed) on a 300K home.

Objective is to minimize EFC when kid applies for college in 3 yrs

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Voltaire2.0
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Re: Pay-off mortgage before FAFSA?

Post by Voltaire2.0 » Thu Sep 26, 2019 2:02 pm

Went through this a few years ago.

I chose not to pay off the mortgage. I preferred liquidity and flexibility over the possibility of a larger scholarship or larger high-interest student loans. One could always take out a second mortgage later, but that has it's own expenses, risks and hassles.

You mileage may vary.

Soon2BXProgrammer
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Re: Pay-off mortgage before FAFSA?

Post by Soon2BXProgrammer » Thu Sep 26, 2019 2:10 pm

spartanswami wrote:
Thu Sep 26, 2019 11:51 am
Since the primary home equity is not considered as asset for the FAFSA, should I pay-off my mortgage?

I'm already maxing out all tax deferred options for me and DW, 401Ks, backdoor Roths, so I will just be pausing post-tax investments to pay down the mortgage, approx 90K left at 3% (7yrs left on a 15yr fixed) on a 300K home.

Objective is to minimize EFC when kid applies for college in 3 yrs
it depends on a million other factors and if you have enough other assets that get assessed for the EFC.

If i was serious about college planning, and optimization and willing to pay for good advice. i'd look up:
https://www.linkedin.com/in/joemessinger/

This is a old demo fo the software his company has created:
https://vimeo.com/309185672

yes, it isn't cheap. $3k for the full meal deal:
https://www.capstonewealthpartners.com/ ... s-pricing/

There are probably otheres that use the software/data he has created for less money. i just haven't looked.

------------------------------
That aside, if you hide all your assets, and you have low income, then yes, you might get grants. But you have to hide all your assets AND have lowish income. It would be good to run a few EFC calculations with different income and asset levels, and then go look to see what various schools might award at that EFC level.

Jack FFR1846
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Re: Pay-off mortgage before FAFSA?

Post by Jack FFR1846 » Thu Sep 26, 2019 2:13 pm

Do the FAFSA form with numbers using assets you have.

Redo it with numbers assuming some assets have paid off your mortgage.

I would expect that if you have income, it's going to dominate over assets. I know it's easy to fixate on assets. I did. During one college finance seminar, I stood up during questions and asked the speaker "So if I go take my money down the street and buy a Ferrari, it'll give us a better chance for aid?". He stood there and looked at me for a couple seconds.....then said "Yah".

We got Stafford loans with the wonderful 1.04% front end load and 5% or so interest rate. Wonderful (say that in a sarcastic voice).
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GreenGrowTheDollars
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Re: Pay-off mortgage before FAFSA?

Post by GreenGrowTheDollars » Sat Sep 28, 2019 9:44 am

You can estimate your FAFSA Expected Family Contribution (EFC) using https://studentaid.ed.gov/sa/fafsa/estimate

The real problem is that the EFC is essentially only an index value. Other than qualifying the student for federal student loans & (if the family income is low enough) Pell grants, everything else is determined by the college.

At my flagship public university, we regularly see kids with an EFC in the $20K range expected to pay the full cost of attendance ($31K). Private universities that only use the FAFSA typically do not get the costs down to the EFC. OOS public colleges rarely provide true financial aid to OOS students, though they may provide merit scholarships.

Selective private colleges don't use the FAFSA to allocate aid in most cases. They use a much more complex form called the CSS/Profile or their own forms. These ask for much more detail, including info on home equity.

Some colleges (Harvard, Stanford for example) that use the CSS/Profile ignore the home equity calculation. Others use 100% of home equity as an allowable asset or a smaller percentage of it. Some have specific protection for students from families with incomes under $X with "typical assets".

If the student's parents are married, the Net Price Calculators will help quite a bit. Setting a budget for annual college expenses will help even more. Just last week, I helped a student take several expensive OOS public colleges off the list because they were well over her family's budget and they do not give aid to OOS students. We also took some private colleges off the list because they would not likely give enough aid.

Assets are valued on the day you file the FAFSA/Profile. You have time to work with that if you choose -- but I would not let the tail wag the dog. Figuring out your realistic budget is the very best place to start.

petulant
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Re: Pay-off mortgage before FAFSA?

Post by petulant » Sat Sep 28, 2019 9:51 am

As others have said, it really depends on specifics like what assets you have in taxable, your income, etc. There are some middle class families with a few children who would benefit by making sure savings beyond an emergency fund go into 401(k), IRA and Roth IRA, and paying down all debt including the mortgage. There are others who will still be expected to pay the full cost of attendance with few or no subsidies even after taking these steps. You should research thoroughly if you're interested in figuring out which one you are (or hire a consultant).

prairieman
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Re: Pay-off mortgage before FAFSA?

Post by prairieman » Sat Sep 28, 2019 10:15 am

It depends how close you are to getting need-based aid, how many kids will be in college at the same time, and other factors. We had paid our mortgage down early and had two kids in college at the same time. Our expected family contribution was reasonably affordable because we had no mortgage, lived below our means, and also had 529 account money for both kids.
My brother with similar earnings sunk his money into building a lake cabin (that really counted against him) and had a more expensive dwelling that was not paid off. He also had one kid in college at a time. He had to pay far more per kid than we did and was simultaneously paying a large mortgage.

Bacchus01
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Re: Pay-off mortgage before FAFSA?

Post by Bacchus01 » Sat Sep 28, 2019 10:29 am

Jack FFR1846 wrote:
Thu Sep 26, 2019 2:13 pm
Do the FAFSA form with numbers using assets you have.

Redo it with numbers assuming some assets have paid off your mortgage.

I would expect that if you have income, it's going to dominate over assets. I know it's easy to fixate on assets. I did. During one college finance seminar, I stood up during questions and asked the speaker "So if I go take my money down the street and buy a Ferrari, it'll give us a better chance for aid?". He stood there and looked at me for a couple seconds.....then said "Yah".

We got Stafford loans with the wonderful 1.04% front end load and 5% or so interest rate. Wonderful (say that in a sarcastic voice).
This. The income limits are awfully low for a lot of people. Our expected contribution came out to more than $150K. I don't know that taking my assets to zero would have changed it enough to get anywhere close to receiving aid. As others have said, calculate it both ways and see what happens.

Mako
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Re: Pay-off mortgage before FAFSA?

Post by Mako » Sat Sep 28, 2019 10:59 am

I might be misinformed, but my impression was if you have the income to do backdoor Roth (i.e. greater than around $200k MFJ) the asset question isn’t really going to matter. If you plan to retire or change jobs on the other hand...

JBTX
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Re: Pay-off mortgage before FAFSA?

Post by JBTX » Sat Sep 28, 2019 11:35 am

If you are posting here, maxing tax deferred accounts and have the ability to pay off your mortgage chances are you won't be eligible for anything other than low interest loans at a rate higher than your mortgage.

JBTX
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Re: Pay-off mortgage before FAFSA?

Post by JBTX » Sat Sep 28, 2019 11:37 am

Duplicate

123
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Re: Pay-off mortgage before FAFSA?

Post by 123 » Sat Sep 28, 2019 11:40 am

JBTX wrote:
Sat Sep 28, 2019 11:35 am
If you are posting here, maxing tax deferred accounts and have the ability to pay off your mortgage chances are you won't be eligible for anything other than low interest loans at a rate higher than your mortgage.
+1 The OP's comment about maximizing backdoor Roths indicates a high level of financial astuteness (as well as likely assets). One thing to watch out for is colleges that offer scholarships based on a high list price to reel in students from families that succumb to the honor of a scholarship.
Last edited by 123 on Sat Sep 28, 2019 11:56 am, edited 1 time in total.
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scubadiver
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Re: Pay-off mortgage before FAFSA?

Post by scubadiver » Sat Sep 28, 2019 11:42 am

Welcome to the forum.

You posted an excellent question. I don't know what the correct answer is in your situation, but here are some things I might consider.

What type of college might your child plan to attend? For example, are you favoring an in-state public school or private liberal arts college? I ask because at some schools the list price more or less is the list price while at other schools, there may be more financial aid depending upon your apparent wealth. This is not a universal truth of course, but rather a generalization.

Another thing I might consider is, what happens if the only financial aid your child receives is in the form of student loans? Are you ok with that or would you have preferred to pick up the difference yourself to avoid those loans. If it's the later, will you be able to do that even after you have placed a substantial portion of your savings into paying off the mortgage? On that point, do you currently have any 529 savings?

Anyway, good luck and welcome to the forum.

ThankYouJack
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Re: Pay-off mortgage before FAFSA?

Post by ThankYouJack » Sat Sep 28, 2019 12:01 pm

I've never liked the strings attached / big penalties with a 529 on non-qualified expenses.

We paid off our mortgage and even contributed to our taxable account before a 529. The plan was to be able to financially independent asap. We both had super secure long term jobs, and then all of the sudden out of the blue my spouse's job was cut. So we're definitely glad we took the approach we did, because if not, things would be a bit more tight.

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Re: Pay-off mortgage before FAFSA?

Post by LadyGeek » Sat Sep 28, 2019 12:16 pm

This thread is now in the Personal Finance (Not Investing) forum (mortgage vs. FAFSA).

Acronym decoder:
FAFSA == FAFSA® (Free Application for Federal Student Aid)
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scubadiver
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Re: Pay-off mortgage before FAFSA?

Post by scubadiver » Sat Sep 28, 2019 12:22 pm

ThankYouJack wrote:
Sat Sep 28, 2019 12:01 pm
I've never liked the strings attached / big penalties with a 529 on non-qualified expenses.

We paid off our mortgage and even contributed to our taxable account before a 529. The plan was to be able to financially independent asap. We both had super secure long term jobs, and then all of the sudden out of the blue my spouse's job was cut. So we're definitely glad we took the approach we did, because if not, things would be a bit more tight.
My wife and I have more of a spread the wealth strategy. After maximizing our tax-advantaged retirement accounts, we split our additional savings between mortgage pre-payment, taxable savings and 529 savings. That said, I see nothing wrong with your approach. The key thing for the OP is to live below his means as it allows the accumulation of savings which buys flexibility and options down the road. I do believe that some paths may be more optimal than others, but part of what determines optimal depends on personal circumstances and preferences, and may only be knowable in retrospect.

ThankYouJack
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Re: Pay-off mortgage before FAFSA?

Post by ThankYouJack » Sat Sep 28, 2019 12:35 pm

scubadiver wrote:
Sat Sep 28, 2019 12:22 pm
ThankYouJack wrote:
Sat Sep 28, 2019 12:01 pm
I've never liked the strings attached / big penalties with a 529 on non-qualified expenses.

We paid off our mortgage and even contributed to our taxable account before a 529. The plan was to be able to financially independent asap. We both had super secure long term jobs, and then all of the sudden out of the blue my spouse's job was cut. So we're definitely glad we took the approach we did, because if not, things would be a bit more tight.
My wife and I have more of a spread the wealth strategy. After maximizing our tax-advantaged retirement accounts, we split our additional savings between mortgage pre-payment, taxable savings and 529 savings. That said, I see nothing wrong with your approach. The key thing for the OP is to live below his means as it allows the accumulation of savings which buys flexibility and options down the road. I do believe that some paths may be more optimal than others, but part of what determines optimal depends on personal circumstances and preferences, and may only be knowable in retrospect.
Yes, so much of personal finance would be easier in retrospect :) I usually point out that Jack Bogle didn't use 529 accounts either. Definitely comes down to one's personal situation and preference and state income tax deduction.

delamer
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Re: Pay-off mortgage before FAFSA?

Post by delamer » Sat Sep 28, 2019 12:58 pm

It seems to me that your goal should be to minimize your out-of-pocket cost for college, not to minimize your EFC.

If the result of paying off your mortgage is that you need to take out higher interest student or parent loans, then you are worse off having paid off the mortgage.

So, as others have noted, you need to evaluate the likelihood that your kid will get scholarships/grants given your overall financial situation.

And the CSS financial form and certain schools treat home equity differently than the FAFSA: http://www.thecollegesolution.com/will- ... d-chances/

cshell2
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Re: Pay-off mortgage before FAFSA?

Post by cshell2 » Sat Sep 28, 2019 1:24 pm

Somewhere between 25-40% of parental income goes towards the EFC compared to 5.6% of assets. If you're high income with just one kid in school, it's doubtful shielding assets is going to help.

You can calculate your EFC yourself using the latest formula.

https://ifap.ed.gov/efcformulaguide/att ... aGuide.pdf

Or, a quick and easy way is to run the Net Price Calculators on all the school's websites you may be considering. They're usually fairly accurate.

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scubadiver
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Re: Pay-off mortgage before FAFSA?

Post by scubadiver » Thu Oct 03, 2019 8:57 am

A relevant article appeared in today's WSJ: https://www.wsj.com/articles/how-home-e ... _lead_pos9

One of my takeaways from this was that the best course of action depends very much upon the specific school your child is planning to attend.

Scubadiver

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