Pay Sibling's Undergrad or Refinance Parent's Mortgage

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Topic Author
Pullupking214
Posts: 17
Joined: Mon Mar 16, 2020 12:24 pm

Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Pullupking214 » Wed May 06, 2020 11:43 pm

Hello Bogleheads,

Question has been asked a few times already. I utilized search function and read the top 5 threads E2E. Still have a few questions about particular situation:

Stats:
  • ME - 28 years old, low 100k salary, 400k NW, single, no kids, stable (for now) employment, renter, no RE exposure
  • Parents - 55 / 48 years old, 90k salary, 400k NW, married 2 kids (including me), stable (for now employment), home owner, no RE exposure
  • Brother - 17 years old, lifeguard, gamer, super mathematically inclined, socially awkward :D (overall good kid)
We are located in MI. Brother worked his tail off in school and obtained EA to Michigan. He will be attending Michigan. I attended smaller school on full ride. I'm currently doing decently well, but both parents/I regret taking the 'easy' way out. I should have attended Michigan. But only paying attention to the TC of attendance resulted in my missing the larger narrative about top 15 schools.

Big fish, small pond analogy doesn't hold true! Especially for competitive programs. Brother hasn't narrowed majors just yet but all options are extremely competitive.
  • Majors Considered
    1) Actuarial Science
    2) Comp Sci
    3) Comp Engineering
All programs START at $30k/year (total cost)

Parents financial status puts us with $0 help to attend Michigan. FAFSA is a rip off! The financial aid offered was ALL unsubsidized loans. This means we are accruing interest day 1 of college till paid off. This is the PREFERABLE option compared to PLUS loans. These (consigned by dad) start at 10.5% interest rate.

My first offer to my parents was 'lets chip in 50/50' and pay brothers way through college together. TC per year is around $30k. Me/Dad can cash flow it yearly. Happy to and would consider it feasible for both of us. Assuming brother gets an internship from year 1 and with a bit of his savings we should pay around 75% of that estimate for years 2-4.

Mom is adamantly against this idea. Her idea is to cash out refinance the house. We were exploring lenders for a refinance. Appraisal $375k, remaining mortgage $150k 4.5% ARM. Original idea was just to refinance to a 15 year fixed at 2.75%. Now Mom wants to cash out refinance for $75k of home equity. The excess over the first years TC of attendance ($45k) would be invested in a Merrill S&P 500 index fund to funds years 2-4.

I was hoping for the cash flow option to pay off my brothers school, but don't know if it is my pride or my financial acumen kicking in....

Thoughts on which options is preferred??

*Please note - University of Michigan, the majors in consideration, and 4 years college timeline are NON-NEGOTIABLE. (mistakes I've made and regretted immensely)

runner540
Posts: 1234
Joined: Sun Feb 26, 2017 5:43 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by runner540 » Wed May 06, 2020 11:48 pm

No way to the cash out refi.
Among the 3 of you (Dad, you, brother working) $30k/year is doable.
Your brother sounds like he might be a good RA (free room/board at many schools) for years 2-4.
Not to mention TA or research jobs.

User avatar
CAsage
Posts: 1760
Joined: Sun Mar 27, 2016 6:25 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by CAsage » Thu May 07, 2020 12:01 am

So Mom is considering taking on guaranteed secured debt to invest in stock with the hope it will go up? Way better for you and your parents to split this, and pay it out of cash flow. Or pay 80% or thereabouts, have bright young student get a small loan or summer job to chip in his end. Your parents are at the time of their life where they should be looking to close out that mortgage, not extend it. Mom sounds like she is looking to avoid any impact to her personal spending, but that's just a guess. Personal priorities are tough.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

jjface
Posts: 3039
Joined: Thu Mar 19, 2015 6:18 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by jjface » Thu May 07, 2020 12:10 am

don't know about the rest but the s&p500 is a bad idea for expenses 2-4 years out. You'll want those in safe assets.

oldfort
Posts: 1067
Joined: Mon Mar 02, 2020 8:45 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by oldfort » Thu May 07, 2020 12:13 am

If I take you out of it for a moment, your parents are way behind on saving for retirement. Your parents can't afford the $120k for your brother's college. If you weren't involved, I would be looking for cheaper options for your brother's college: ex. community college for the first two years. I'm assuming your parents won't have a defined benefit pension.

User avatar
LilyFleur
Posts: 1271
Joined: Fri Mar 02, 2018 10:36 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by LilyFleur » Thu May 07, 2020 12:37 am

How much of your parent's net worth is in tax-deferred retirement accounts? If a decent portion of their net worth is in regular non tax-deferred accounts in cash, stocks and/or bonds that are NOT in a 401k or IRA, FAFSA will deem that as available cash for school bills and it will count against financial aid. Their house equity should not count against them for a state school. I had a friend who had to pay full freight for her son's tuition because a great deal of their net worth was in an investment account that was a regular investment account, not a tax-deferred (retirement account).

Does the university offer any financial aid based on FAFSA? Are there state grant programs?

Is there any possibility a mistake could have been made when entering information on the FAFSA? When I filled out the FAFSA, I paid down every bill I possibly could (ie, paid property taxes early, etc.) in order to reduce the amount in my checking account that I would have to report. (Caveat: I was a single mom, and there wasn't much to spend out of the account, anyway.)

Does your mom work? If not, maybe it's time to start. Does your brother have a job? If not, maybe it's time to start. Did he qualify for work study jobs? Did whoever filled out the FAFSA indicate on the FAFSA that he wanted to be considered for work study? Work study jobs are great; they provide flexibility for studies being the priority, so if he would need the week off before finals, he could get it. But they are considered a form of financial aid as the federal government pays the student's wages.

Can your brother live at home to save money?

If your parents get a large influx of cash from a re-fi and put part of it in stocks, or anywhere other than a tax-deferred retirement account, they will not help your brother out at all. It is much better to leave equity in the house as it is protected there from being counted as a spendable asset.

If there is no way around paying the entire amount, there are tax credits that can be used. Strategizing for financial aid is a big topic and there is a lot of information on how to arrange finances in order to qualify for the maximum financial aid. https://www.cappex.com/articles/money/h ... -the-fafsa

Also, it sounds like you feel that going to a school that gave you a full ride had a negative impact on your earning ability. If you are going to help your brother get a degree with higher paying power than you did, I suggest you make it a loan, in writing. You could always forgive it if he ends up not making as much money as you anticipate. I suspect you took a full ride because your parents couldn't afford to help you at a flagship state university. You may meet the spouse of your dreams and want to be having children in two years... you may regret not being able to save more for your own house. This is just my own conjecture, but looking at the amount of your net worth and the amount of your parents' net worth, you are better at saving than they are, and it's really not fair for your brother's tuition to fall on your shoulders.

I think you are being such a kind sibling to want to help your brother out. I wish you the best!

User avatar
Watty
Posts: 19765
Joined: Wed Oct 10, 2007 3:55 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Watty » Thu May 07, 2020 1:03 am

Pullupking214 wrote:
Wed May 06, 2020 11:43 pm
Parents - 55 / 48 years old, 90k salary, 400k NW, married 2 kids (including me), stable (for now employment), home owner, no RE exposure
......
Mom is adamantly against this idea. Her idea is to cash out refinance the house. We were exploring lenders for a refinance. Appraisal $375k, remaining mortgage $150k 4.5% ARM.
A lot does not add up.

They have $225K in home equity and $400K net worth which would imply that they only have $175K in investments.

I would guess that their mortgage payment is less than $1,000 a month but they have $90K in salary. It seems that even after taxes they should have more cash flow than you imply.

A big problem is that your parents are not doing super well on their retirement even if you did not include their home equity in their net worth. If they take out a new 15 year mortgage then it would not be paid off until they are 70 and 63 and retiring while you still have a mortgage makes it harder to get the numbers to work.

There is also a friggin pandemic and talk of a possible depression and Michigan seems to be getting hit hard. Now is not the time to do a cash out refinance, but they should look at refinancing just to get a better interest rate.

I don't know the Michigan housing market but I would assume that a $375K house might be pretty large. If they will have a bunch of empty rooms with both of the kids out of the house then now might be a good time for your parents to downsize and they may be able to have a very small mortgage or even a paid off house.
Pullupking214 wrote:
Wed May 06, 2020 11:43 pm
The excess over the first years TC of attendance ($45k) would be invested in a Merrill S&P 500 index fund to funds years 2-4.
Money that is needed in less than five years should not be invested in the stock market.
Pullupking214 wrote:
Wed May 06, 2020 11:43 pm
My first offer to my parents was 'lets chip in 50/50' and pay brothers way through college together. TC per year is around $30k. Me/Dad can cash flow it yearly. Happy to and would consider it feasible for both of us. Assuming brother gets an internship from year 1 and with a bit of his savings we should pay around 75% of that estimate for years 2-4.
That sounds doable and generous on your part.

After your parents refinance to get a better rate they could also get a home equity line of credit that they could use for college costs if you are not able to cashflow the cost. I do not think that would be a good idea but having that set up might be enough to keep your mom happy.

sawdust60
Posts: 303
Joined: Tue Jul 17, 2018 12:06 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by sawdust60 » Thu May 07, 2020 1:38 am

You might consider a hybrid approach. You and parents contribute, plus some loans. What amount of debt is reasonable at the end of 4 years?

Some employers are offering student loan repayment as an employee benefit.

And you can build a reserve fund to help with loan repayments, should other assistance not materialize.

Spirit Rider
Posts: 13209
Joined: Fri Mar 02, 2007 2:39 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Spirit Rider » Thu May 07, 2020 5:14 am

Watty wrote:
Thu May 07, 2020 1:03 am
They have $225K in home equity and $400K net worth which would imply that they only have $175K in investments.
The OP will have to answer what they meant, but net worth almost always implies liquid net worth only. Home equity is not included.

OnTrack2020
Posts: 593
Joined: Mon Mar 20, 2017 10:24 am

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by OnTrack2020 » Thu May 07, 2020 7:49 am

I say this as a mom who has 2 kids graduating from college this year:

First of all, if your brother is super smart and highly mathematically inclined, do not let him go to a community college. It will probably bore him to tears. Also, from my reading, the pay difference between computer science and computer engineering is around $20,000--just something to think about.

Here are some other things to consider:

$30,000 per year for 4 years = $120,000 ------> note tuition increase of estimated 4% a year.

Once your brother starts college, your parents will, more than likely, take the education tax credits on their tax returns which will give them $2,500 a year. Use that $2,500 credit they will receive in the Spring after filing their taxes toward the next academic year's tuition, books, housing, etc. That will knock off $10,000 over the 4 years.

Now you are down to $110,000

I know it's tough out there now in terms of jobs. But, am assuming, that your brother could easily find a part-time job during the summer which would provide $3,000 or more worth of income which would go directly toward tuition. That means this summer he should be contributing $3,000 for this upcoming academic year. So, $3,000 x 4 years = $12,000

Now you are down to $98,000

Until things can be all flushed out with regards to how this is going to work out over the 4 years, this first year have a him take out a "small" loan--I think he can take out $5,500. It will be peanuts in the long run.

Now you are at 92,500.

Every paycheck (26 paychecks a year), I wrote a check for $250 and put it into a savings accounts toward the next semester's tuition. That gives $6,500 a year x 2 ($6,500 from you and $6,500 from your parents per year). That's $13,000 per year x 4 years = $52,000. If you can up this amount at all to say $300 per paycheck, the total amount would be $62,400 ($300 x 26 x 2 households contributing x 4 years) = $62,400.

Using $62,400, now you are down to $30,100.

That leaves around $30,000 split between you and your parents to come up with or $15,000 per household or $3,750 per year.

If you or your parents have not spent your stimulus check, there's another potential $3,600 to use. Also, if you have additional tax refund money besides the education tax credits, that can be used.

I'll ask these questions also. Is your brother receiving any scholarships to attend? Any scholarships from high school? Do you or your parents receive any bonus money? We threw pretty much all bonus money toward college bills.

If your brother lives on campus the first two or three years and then moves off campus the last year, that will also make a huge difference from a financial standpoint. It's just much cheaper.

This is extremely doable. But do not have your parents refinance their home. They should also be continuing to save for their own retirement. I admire the fact that you and your parents want to work together to make this happen.

Also, if he does end up doing a work-study, do not plan on that going toward any tuition, etc., because typically it's just not that much money and it will go toward other things like eating out, buying some fun stuff, gas, personal hygiene items, etc.
Last edited by OnTrack2020 on Thu May 07, 2020 8:03 am, edited 1 time in total.

Valuethinker
Posts: 40279
Joined: Fri May 11, 2007 11:07 am

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Valuethinker » Thu May 07, 2020 8:00 am

Pullupking214 wrote:
Wed May 06, 2020 11:43 pm
Hello Bogleheads,

Question has been asked a few times already. I utilized search function and read the top 5 threads E2E. Still have a few questions about particular situation:

Stats:
  • ME - 28 years old, low 100k salary, 400k NW, single, no kids, stable (for now) employment, renter, no RE exposure
  • Parents - 55 / 48 years old, 90k salary, 400k NW, married 2 kids (including me), stable (for now employment), home owner, no RE exposure
  • Brother - 17 years old, lifeguard, gamer, super mathematically inclined, socially awkward :D (overall good kid)
We are located in MI. Brother worked his tail off in school and obtained EA to Michigan. He will be attending Michigan. I attended smaller school on full ride. I'm currently doing decently well, but both parents/I regret taking the 'easy' way out. I should have attended Michigan. But only paying attention to the TC of attendance resulted in my missing the larger narrative about top 15 schools.

Big fish, small pond analogy doesn't hold true! Especially for competitive programs. Brother hasn't narrowed majors just yet but all options are extremely competitive.
  • Majors Considered
    1) Actuarial Science
    2) Comp Sci
    3) Comp Engineering
All programs START at $30k/year (total cost)

Parents financial status puts us with $0 help to attend Michigan. FAFSA is a rip off! The financial aid offered was ALL unsubsidized loans. This means we are accruing interest day 1 of college till paid off. This is the PREFERABLE option compared to PLUS loans. These (consigned by dad) start at 10.5% interest rate.

My first offer to my parents was 'lets chip in 50/50' and pay brothers way through college together. TC per year is around $30k. Me/Dad can cash flow it yearly. Happy to and would consider it feasible for both of us. Assuming brother gets an internship from year 1 and with a bit of his savings we should pay around 75% of that estimate for years 2-4.

Mom is adamantly against this idea. Her idea is to cash out refinance the house. We were exploring lenders for a refinance. Appraisal $375k, remaining mortgage $150k 4.5% ARM. Original idea was just to refinance to a 15 year fixed at 2.75%. Now Mom wants to cash out refinance for $75k of home equity. The excess over the first years TC of attendance ($45k) would be invested in a Merrill S&P 500 index fund to funds years 2-4.

I was hoping for the cash flow option to pay off my brothers school, but don't know if it is my pride or my financial acumen kicking in....

Thoughts on which options is preferred??

*Please note - University of Michigan, the majors in consideration, and 4 years college timeline are NON-NEGOTIABLE. (mistakes I've made and regretted immensely)
The workable way is you 3 split the tuition - parents brother student.

They should not take on new debt nor cash out their home equity.

Only reason to do it that way would be impact on financial aid (I am not US based so I don't have any information on that).

You are doing an amazing thing for your sibling. Someday he may be able to repay you and your parents - let's hope so. But a gift is a gift, in the giving, you let loose control over it. If there's any obligation implied then it is not a true gift.

Topic Author
Pullupking214
Posts: 17
Joined: Mon Mar 16, 2020 12:24 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Pullupking214 » Thu May 07, 2020 8:25 am

LilyFleur wrote:
Thu May 07, 2020 12:37 am
Is there any possibility a mistake could have been made when entering information on the FAFSA?


Can your brother live at home to save money?


I think you are being such a kind sibling to want to help your brother out. I wish you the best!
Thank you for the kind words!

1) No mistakes made entering FAFSA. Parents have an EF of around $85k in cash sitting in a Chase account. Makes no sense. But they don't listen 100% to my Boglehead tendencies. It was supposed to be used to pay down the mortgage and maybe something else, but not exactly sure why it still hasn't been done yet. Seems my parents are just comfortable with low interest debt...


2) Nope. Too far away from Ann Arbor. Only option is campus housing year 1 and cheapest apartment with as many roommates as building code will allow years 2 - 4.

Topic Author
Pullupking214
Posts: 17
Joined: Mon Mar 16, 2020 12:24 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Pullupking214 » Thu May 07, 2020 8:26 am

Spirit Rider wrote:
Thu May 07, 2020 5:14 am
The OP will have to answer what they meant, but net worth almost always implies liquid net worth only. Home equity is not included.
Spot on. NW was liquid NW only. Not including home equity in the $400k for parents NW.

TallBoy29er
Posts: 956
Joined: Thu Jul 18, 2013 9:06 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by TallBoy29er » Thu May 07, 2020 8:31 am

Dude, you're a good brother. :beer

So how many pull-ups can you rock out in a set?

Topic Author
Pullupking214
Posts: 17
Joined: Mon Mar 16, 2020 12:24 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Pullupking214 » Thu May 07, 2020 8:32 am

Watty wrote:
Thu May 07, 2020 1:03 am
A big problem is that your parents are not doing super well on their retirement even if you did not include their home equity in their net worth. If they take out a new 15 year mortgage then it would not be paid off until they are 70 and 63 and retiring while you still have a mortgage makes it harder to get the numbers to work.

I don't know the Michigan housing market but I would assume that a $375K house might be pretty large. If they will have a bunch of empty rooms with both of the kids out of the house then now might be a good time for your parents to downsize and they may be able to have a very small mortgage or even a paid off house.

Dad/Mom have no intention of retiring anytime soon. While not 100% busy bodies, they are content enough in their occupations. While carrying mortgage debt into retirement isn't the BEST, boglehead tested option, not all bogleheads came out of the same starting blocks


$375k house is the perfect house. Middle class suburb, permanent home, communities/temples build around it. No options to downsize. Only 20 years down the line when the stairs become a problem.

Topic Author
Pullupking214
Posts: 17
Joined: Mon Mar 16, 2020 12:24 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Pullupking214 » Thu May 07, 2020 8:33 am

TallBoy29er wrote:
Thu May 07, 2020 8:31 am
Dude, you're a good brother. :beer

So how many pull-ups can you rock out in a set?
Cheers man! I'm not the best, but I do want to see the kid succeed

Edit: on second thought I'm really not. I put him in headlocks and tell him to go to sleep too often to be healthy

21 for now. Working on getting the numbers up : )
Last edited by Pullupking214 on Thu May 07, 2020 9:17 am, edited 1 time in total.

rbaldini
Posts: 1436
Joined: Mon Mar 23, 2015 3:20 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by rbaldini » Thu May 07, 2020 8:37 am

Why doesn’t brother just take on the loan? At least for part of it. Maybe 50%? Make him put some skin in the game, instead of just giving him free college.

Also I know you think the college choice is non-negotiable, but I personally think you’re putting too much on the importance of the college’s name. I'll say no more about that.

Also, for the love of god, don't pick actuarial science over computer science or engineering :sharebeer.
Last edited by rbaldini on Thu May 07, 2020 9:21 am, edited 7 times in total.

User avatar
ICMoney
Posts: 335
Joined: Fri Oct 28, 2016 2:38 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by ICMoney » Thu May 07, 2020 8:46 am

Not sure how likely getting an internship is starting after year 1 (maybe this is common for Michigan students? I am not familiar), but if this is the goal you could consider having him look into studying for the first actuarial exam now if he is so inclined and thinks he may start out in that major.

User avatar
Sandtrap
Posts: 11036
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Sandtrap » Thu May 07, 2020 9:04 am

An option of so so many.

Community College to get prerequisites and an AA.
Work part time.

Test drive before buying.

Lots of ways and opinions and experiences on these things.

j🏝
Wiki Bogleheads Wiki: Everything You Need to Know

Jack FFR1846
Posts: 12081
Joined: Tue Dec 31, 2013 7:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Jack FFR1846 » Thu May 07, 2020 9:14 am

If the brother is a programming wizz and has already been working for a company, then he can likely get a summer job/internship. Otherwise, he'll likely be struggling to find any job. My older son attempted to work retail/food his first summer and failed miserably until he found a pizza delivery job, which worked. $7 an hour and he had to pay his own gas....$4 a gallon at the time in a gas guzzling Nissan 350Z. Next summer, he got an internship at my work. Small company that hired employee kids as a favor. It was made clear that if I left, he'd be gone too. Data sheet updates, working for a scatter brained niece of the CEO. Following summer, nothing. He got a newspaper route and was at the warehouse before 1am to wait for the delivery truck as the first in line were the first to get the papers. He loved the job and took on 2 routes, making good money. Next summer, used contact with girl friends 2 parents at military contractor who hires thousands over the summer, mostly to take notes and get coffee. His great demonstration of skills landed him a job doing finite element analysis on enclosures for power systems in boats that go under water.

FAFSA is totally fair and is out there so everyone knows what matters. From worst to best,

student income
student assets
parents income
parents assets

The problem is that middle class parents think this is pre Ronald Regan years where grants existed and a year at a top engineering college was $8k (this is what I paid back then). Not any more. Unless you're below the poverty line, you get zip for grants and work study. You get Stafford loans. Your brother should take the staffords every year.

If you're all dead set to go to Michigan, great. I have a community college degree, a private 3 letter college engineering Bachelors and a top specialty engineering college Masters. There are differences. I've also taken classes at about 5 other colleges. The workload and challenge will vary, so all that is to say that Michigan may be worth the difference. I will also say that if you really look, you can be smarter than paying full price for a private, expensive college. In his senior year, my son went to part time status. He could do this because his core engineering courses were done. He worked on his senior thesis and took all the (sorry, I'm an engineer) garbage courses to fulfill his requirements at the local community college. He still graduates from the prestigious private college and nobody cares that he took a couple non-core courses for $700 a course instead of $4300 a course. I would submit that even buying the brother a $5k car to get to community college for some courses makes financial sense.

There are pros and cons to just doing the basic courses first at community college. It's cheap, certainly (my younger son is in one now, so I know first hand) and *some* courses transfer. Warning....whether they transfer depends on the college AND the program that the student is transferring into. We looked at this extensively. UMass Lowell Computer Science department may accept the physics 1 class at his CC, but the Electrical and Computer engineering department there may not. Also, almost every college will require a B or better to transfer anything.

I don't know what the best way is to go. I'm happy to see that you're willing to help. In my own case, we started saving a long, long time ago, expecting our 2 kids would cost $1M to get through college. I'm happy to say that DS#1 has only cost about $300k.
Bogle: Smart Beta is stupid

mc126
Posts: 8
Joined: Tue Apr 19, 2011 9:01 am

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by mc126 » Thu May 07, 2020 9:14 am

I have 3 college students in my house and 2/3 are not enjoying the online learning experience. They are not receiving the same instruction, support, or experience. If they do not return in fall or return for only a short time and universities have to return to online learning, I would feel somewhat cheated or shorted when considering what they are receiving. When you are paying full freight for education, this matters A LOT.

I'd consider deferring enrollment for one year. With the uncertainty around COVID and the possibility of continued online learning, he could wait a year and work full time to contribute a considerable amount to his own education. One year of deferment sounds like a lot when you are 18, but in the current times it could have lots of benefits.

Your parents could also explore options regarding Financial Aid strategies and legal ways to attempt to qualify. They may want to pay a consultant. Even if they tell them the same thing you say, it will be received differently when they are paying for the advice. Lots of legal strategies out there to increase chances of aid.
Last edited by mc126 on Thu May 07, 2020 9:19 am, edited 1 time in total.

Topic Author
Pullupking214
Posts: 17
Joined: Mon Mar 16, 2020 12:24 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Pullupking214 » Thu May 07, 2020 9:19 am

ICMoney wrote:
Thu May 07, 2020 8:46 am
Not sure how likely getting an internship is starting after year 1 (maybe this is common for Michigan students? I am not familiar), but if this is the goal you could consider having him look into studying for the first actuarial exam now if he is so inclined and thinks he may start out in that major.
Definitely an option. We just want him to have the best college experience. Not pushing too hard on the exams. He can take em once he solidifies his field of study.

Def a possibility at Michigan. Many kids start their first year

stoptothink
Posts: 7870
Joined: Fri Dec 31, 2010 9:53 am

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by stoptothink » Thu May 07, 2020 9:28 am

mc126 wrote:
Thu May 07, 2020 9:14 am
I'd consider deferring enrollment for one year. With the uncertainty around COVID and the possibility of continued online learning, he could wait a year and work full time to contribute a considerable amount to his own education.
I'd normally say this is a terrible idea as kids are just going to screw around and accomplish nothing, but not this one. If he is bound and determined to go to UM, this might be the best path in this specific situation.

stoptothink
Posts: 7870
Joined: Fri Dec 31, 2010 9:53 am

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by stoptothink » Thu May 07, 2020 9:32 am

Pullupking214 wrote:
Thu May 07, 2020 9:19 am
ICMoney wrote:
Thu May 07, 2020 8:46 am
Not sure how likely getting an internship is starting after year 1 (maybe this is common for Michigan students? I am not familiar), but if this is the goal you could consider having him look into studying for the first actuarial exam now if he is so inclined and thinks he may start out in that major.
Definitely an option. We just want him to have the best college experience. Not pushing too hard on the exams. He can take em once he solidifies his field of study.
Unfortunate reality is there may not be the resources for him to have "the best college experience". As someone who has attended 4 universities, including a "public elite", and taught at two others; I do begin rolling my eyes when the term "college experience" is brought up. It's great that you all are willing to sacrifice so much for him.

User avatar
market timer
Posts: 6302
Joined: Tue Aug 21, 2007 1:42 am

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by market timer » Thu May 07, 2020 9:50 am

Michigan at $30K/year is a great deal, and an excellent place to study math and/or CS.

Your brother can get $27K in total in Stafford Loans over four years. You and your parents should be able to cash flow the rest, assuming you all keep your jobs. I'd discuss contingency plans in advance with everyone that include the possibility of job loss.

User avatar
Watty
Posts: 19765
Joined: Wed Oct 10, 2007 3:55 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Watty » Thu May 07, 2020 9:56 am

Pullupking214 wrote:
Thu May 07, 2020 8:26 am
Spirit Rider wrote:
Thu May 07, 2020 5:14 am
The OP will have to answer what they meant, but net worth almost always implies liquid net worth only. Home equity is not included.
Spot on. NW was liquid NW only. Not including home equity in the $400k for parents NW.
.....
remaining mortgage $150k 4.5% ARM.
.....
Parents have an EF of around $85k in cash sitting in a Chase account. Makes no sense. But they don't listen 100% to my Boglehead tendencies. It was supposed to be used to pay down the mortgage and maybe something else, but not exactly sure why it still hasn't been done yet.
Do you know how that $400k is split between their taxable accounts and retirement accounts?

It has been a while since I have looked at it but as I recall in the FAFSA calculations home equity and retirement accounts are not counted when figuring out the expected contributions. If most of that $400K is in taxable accounts that could be part of the reason that the FAFSA numbers were not good. You would need to research it but it could be if they paid off the house, or at least paid down the loan, then the FAFSA numbers might be more favorable with $150K less in taxable accounts and your brother might qualify for better loans.

With a paid off house your parents could then use the freed up mortgage payment to help pay for college costs. Right now they are paying almost $6,750 ($150K * 4.5%) in interest a year on their mortgage which is over 20% of what your brother needs for the college costs. Even if they just partway paid the mortgage down and refinanced at a lower rate that could greatly reduce their mortgage payment.

It would also be good to look into what your brother could make while working during college. When my son was working on his Computer Science degree he had a part time job at the campus computer center by his sophomore year. It was not high paying but it gave him some income and also good work experience which helped him when he was looking for his first job. At $15 an hour it would only take 66 hours a month(16 hours a week) to make $1,000 a month($12K a year). That is 40% of the $30K a year that he would need. There would be taxes and things expenses but working part time can add up.

If he does not have good summer jobs lined it then it may also be more cost effective for him to take classes during the summer instead to help ensure that he graduates in four year or maybe even less than four years. Most apartments require a 12 month lease so his housing may already be paid for during the summer.

I would also caution that some minimum wage job at a fast food restaurant might be counter productive. One of my sons roommates during his freshman year was working at a Taco Bell and would do things like work until 2:00AM during finals week and that hurt is grades. If possible not working during at least his first semester might be a good idea so he can develop his study skills and adjust to college life. Sometimes you "do what you gotta do" but taking a heavier class load could be more cost effective than a minimum wage job flipping burger. We were paying for our sons college and we told him he could not work during the school year unless it was related to his major.
Pullupking214 wrote:
Thu May 07, 2020 8:25 am
2) Nope. Too far away from Ann Arbor. Only option is campus housing year 1 and cheapest apartment with as many roommates as building code will allow years 2 - 4.
In normal times that might be too far away but with the pandemic most colleges have not decided if they will be having classes in person this fall or not. He could very well end up taking his classes online for the first semester or two which could help him save on the housing costs by living with his parents.

One other thing to keep in mind is that the finances for the full four years do not need to be all figured out now. If would be great if the $120K was just sitting in a bank but there are lots of ways the costs can be paid so while it is good to have plans it will also work to figure it out as you go.

User avatar
TomatoTomahto
Posts: 10644
Joined: Mon Apr 11, 2011 1:48 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by TomatoTomahto » Thu May 07, 2020 10:04 am

Michigan would be a great choice for a brother who sounds like he’s got it together. Of the majors, CS is far and away the best of them. Internships for strong mathy types might surprise all of you, at least after the first summer.

I’m usually all for gifts, but I think that you, as a sibling, should have a contract with him and make it a loan. As indicated upthread, turn it into a gift if a few years later it seems like a good idea.

Your parents must be very proud.
Okay, I get it; I won't be political or controversial. The Earth is flat.

TheDDC
Posts: 978
Joined: Mon Jan 08, 2018 11:11 am

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by TheDDC » Thu May 07, 2020 10:19 am

Pullupking214 wrote:
Wed May 06, 2020 11:43 pm
Hello Bogleheads,

Question has been asked a few times already. I utilized search function and read the top 5 threads E2E. Still have a few questions about particular situation:

Stats:
  • ME - 28 years old, low 100k salary, 400k NW, single, no kids, stable (for now) employment, renter, no RE exposure
  • Parents - 55 / 48 years old, 90k salary, 400k NW, married 2 kids (including me), stable (for now employment), home owner, no RE exposure
  • Brother - 17 years old, lifeguard, gamer, super mathematically inclined, socially awkward :D (overall good kid)
We are located in MI. Brother worked his tail off in school and obtained EA to Michigan. He will be attending Michigan. I attended smaller school on full ride. I'm currently doing decently well, but both parents/I regret taking the 'easy' way out. I should have attended Michigan. But only paying attention to the TC of attendance resulted in my missing the larger narrative about top 15 schools.

Big fish, small pond analogy doesn't hold true! Especially for competitive programs. Brother hasn't narrowed majors just yet but all options are extremely competitive.
  • Majors Considered
    1) Actuarial Science
    2) Comp Sci
    3) Comp Engineering
All programs START at $30k/year (total cost)

Parents financial status puts us with $0 help to attend Michigan. FAFSA is a rip off! The financial aid offered was ALL unsubsidized loans. This means we are accruing interest day 1 of college till paid off. This is the PREFERABLE option compared to PLUS loans. These (consigned by dad) start at 10.5% interest rate.

My first offer to my parents was 'lets chip in 50/50' and pay brothers way through college together. TC per year is around $30k. Me/Dad can cash flow it yearly. Happy to and would consider it feasible for both of us. Assuming brother gets an internship from year 1 and with a bit of his savings we should pay around 75% of that estimate for years 2-4.

Mom is adamantly against this idea. Her idea is to cash out refinance the house. We were exploring lenders for a refinance. Appraisal $375k, remaining mortgage $150k 4.5% ARM. Original idea was just to refinance to a 15 year fixed at 2.75%. Now Mom wants to cash out refinance for $75k of home equity. The excess over the first years TC of attendance ($45k) would be invested in a Merrill S&P 500 index fund to funds years 2-4.

I was hoping for the cash flow option to pay off my brothers school, but don't know if it is my pride or my financial acumen kicking in....

Thoughts on which options is preferred??

*Please note - University of Michigan, the majors in consideration, and 4 years college timeline are NON-NEGOTIABLE. (mistakes I've made and regretted immensely)
Option C: none of the above. Sounds like brother should be looking for a job or internship to pay for school.

In this current situation I wouldn’t even plan on college for fall. Not worth the cost of tuition most times anyway, but especially not for online college courses.

He can get started working in IT with no college or community college, then transfer. IT is a fabulous career for doing this. I know many who began with an AS and made six figures by the time they were in their 30s. It’s not uncommon at all, and you don’t need to move to Silicon Valley to pursue that course of action.

-TheDDC
Rules to wealth building: 90-100% VTSAX piled high and deep, 0-10% VIGAX tilt, 0% given away to banks, minimize amount given to medical-industrial complex

tashnewbie
Posts: 369
Joined: Thu Apr 23, 2020 12:44 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by tashnewbie » Thu May 07, 2020 11:17 am

It's admirable of you to want to help your brother and ensure he graduates with no (or very little) debt. I think you're underselling yourself though. You're under 30, making six figures, and have a mid-six figures NW. That's amazing in my book. Your'e probably way ahead of the vast majority of people your age (and most of those older). Your parents did a great job raising a conscientious and kind son!

As others have mentioned, with the current pandemic, lots of schools are still trying to decide whether they will have in-person instruction in the fall.
If I were a high school senior and facing the prospect (or certainty) of online classes for the first semester or two, I'd opt to defer for a year and work instead. I'm not familiar with FAFSA rules, but if your brother does decide to defer, could your parents throw the $85K they have in savings at the mortgage, which could reduce the income considered for financial aid eligibility?

oldfatguy
Posts: 624
Joined: Tue Feb 27, 2018 1:38 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by oldfatguy » Thu May 07, 2020 11:49 am

Pullupking214 wrote:
Wed May 06, 2020 11:43 pm

Parents financial status puts us with $0 help to attend Michigan. FAFSA is a rip off!
How do you imagine you are being "ripped off" by FAFSA? FAFSA is simply the tool used to collect income and asset data, to determine eligibility for financial aid. Your parents have income and assets that make them ineligible for need-based financial aid.

MMiroir
Posts: 52
Joined: Sun Mar 29, 2020 12:14 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by MMiroir » Thu May 07, 2020 12:07 pm

First, congratulations on your financial position, and on being willing to help out your brother. The vast majority of people would not be in your financial position, and most of them would not offer to help your sibling the way you are. Some things to consider.

1 - The following is a link to Michigan's annual placement report for the engineering college.

http://career.engin.umich.edu/wp-conten ... rt1718.pdf

The average starting salary for a CS major is around $100,000, so the amount saved by going to CC is peanuts compared to the potential return of being at Michigan for four years. Additionally, being at Michigan, his chances of getting a high paying summer internship will increase significantly. One of my kids has a FANG internship this summer that pays $25K for 12 weeks of work. Of the schools they recruited at, they took nine from Michigan, two from MSU and none from the other schools in the state. If he as bright as you say he is, you are correct that he needs to go there.

2 - Your parents need to learn to manage the FASFA as otherwise the school will be sucking every available dollar out of their pocket. Each school considers assets differently, and you need to do find out the financial aid formula that Michigan is using. Some schools take into account home equity and retirement assets, but they generally all consider retirement contributions for that year.

One thing for certain is that your parents need to get rid of that lump of cash sitting in a taxable account because if they don't, the school get rid of it for them. If Michigan does not consider home equity, the best move is to pay down the mortgage and get a pre-approved HELOC as a rainy day fund. If Michigan includes home equity in their calculations, then moving the cash into a retirement account or investing in a long term asset (home improvements or car) are some options. At this point, it is probable that they will have to pay the full $30,000 cost in year one with the idea of reducing it in the following years.

3 - Since you are not a parent, your income and assets are not counted on the FAFSA. The best way to reduce the cost on the FAFSA would be for your parents to pay for the first two years to drive down their cash reserves, and you pick up the last two years when hopefully some of the need-based aid kicks in.

cjclueless
Posts: 31
Joined: Fri Dec 06, 2013 12:18 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by cjclueless » Thu May 07, 2020 1:00 pm

Also please keep in mind when considering financial aid is that in addition to FAFSA, UMich uses the CSS Profile which delves deeper into a family's financials. They do consider home equity as available for expenses, though most institutions have some cap on that. They also may consider any balance in protected retirement accounts normally to the extent they are out of alignment with typical balances for the family age, etc.

Michigan's policy is to meet full demonstrated need for all in state accepted students based on the FAFSA and CSS. It may be worth a conversation with Financial Aid as to what is driving the Stafford-only award just in case something was mis-interpreted. Of course need can be in the eye of the beholder.

As for the brother paying a portion of the bills, tread carefully. In subsequent years the other brother may have to report these payments on FAFSA as income (for which the FAFSA formula is not kind!)

CJ

Afty
Posts: 1301
Joined: Sun Sep 07, 2014 5:31 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Afty » Thu May 07, 2020 1:08 pm

Hard no to the cash out refinance.

I support your plan to help pay your brother's college expenses; that's a wonderful thing to do. Michigan is an excellent school. /thumbsup

User avatar
Stinky
Posts: 4476
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Stinky » Thu May 07, 2020 1:11 pm

I would not recommend community college for the first two years. The three majors cited are all very competitive, and your brother will be well behind his peers when he gets to U Mich in his junior year.

Brother will need to work his tail off while in school. Try to work 10-20 hours per week from the start. And apply for every scholarship that moves. Hopefully his grades will be such that he can get a merit based scholarship down the road.

And don’t discount actuarial science as a major. U Mich has one of the very best actuarial programs in the nation. And actuarial unemployment is zero, and has been for many years.
It's a GREAT day to be alive - Travis Tritt

ncbill
Posts: 777
Joined: Sun Jul 06, 2008 4:03 pm
Location: Western NC

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by ncbill » Thu May 07, 2020 2:22 pm

Brother seems physically fit enough to join the MI National Guard to take advantage of their tuition benefits:

https://minationalguard.dodlive.mil/ret ... -benefits/

123
Posts: 5996
Joined: Fri Oct 12, 2012 3:55 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by 123 » Thu May 07, 2020 2:47 pm

I'll join the chorus for community college for the first two years. Community college programs are an excellent way to get general education courses out of the way and for many majors the lower division courses there can be superior to what is offered at a 4 year school. Employers only care where the Bachelor's degree was earned. If you attend a community college you do have to plan ahead and take only courses that are transferable (to avoid wasted time) but if he's bound for a bachelor's program he should be able to figure that out.

I don't think it's appropriate for you or your parents to put your financial health at risk so your brother can enjoy the "fun and games" of an on-campus experience for the first two years when there are much lower cost alternatives available.
The closest helping hand is at the end of your own arm.

Spirit Rider
Posts: 13209
Joined: Fri Mar 02, 2007 2:39 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Spirit Rider » Thu May 07, 2020 3:04 pm

Community college is a great idea for many majors, but in almost all cases it is far less than optimal for STEM majors.

The acceptance rates and transfer of credits into most decent STEM undergraduate programs from community colleges are highly problematic.

My state has very generous acceptance into the university system. Generally, you are guaranteed acceptance with a >= 3.2 GPA and transfer credits of any course with a >= 3.0 grade. However, none of that applies to the STEM Programs.

Not to mention if the STEM student is at all bright, they are likely to be massively bored and under challenged in a community college.

User avatar
LilyFleur
Posts: 1271
Joined: Fri Mar 02, 2018 10:36 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by LilyFleur » Thu May 07, 2020 4:16 pm

cjclueless wrote:
Thu May 07, 2020 1:00 pm
Also please keep in mind when considering financial aid is that in addition to FAFSA, UMich uses the CSS Profile which delves deeper into a family's financials. They do consider home equity as available for expenses, though most institutions have some cap on that. They also may consider any balance in protected retirement accounts normally to the extent they are out of alignment with typical balances for the family age, etc.

Michigan's policy is to meet full demonstrated need for all in state accepted students based on the FAFSA and CSS. It may be worth a conversation with Financial Aid as to what is driving the Stafford-only award just in case something was mis-interpreted. Of course need can be in the eye of the beholder.

As for the brother paying a portion of the bills, tread carefully. In subsequent years the other brother may have to report these payments on FAFSA as income (for which the FAFSA formula is not kind!)

CJ
CSS is much more difficult to strategize for than FAFSA, it gets into areas that FAFSA does not consider. So, simply using a large cash sum to pay down the mortgage might not help. You might need to research how much home equity counts against the financial aid. There are other options, though. The parents could do a big Roth conversion this year, and use cash to pay the taxes, but that might only help him his senior year, since I think you report the income from two years prior for FAFSA, not sure about CSS. It would also depend on how much the retirement assets count against the student for CSS. Of course, if your parent's income automatically disqualifies your brother for financial aid, there is no point in moving around the assets.

I do understand that you want your brother to have a better start than you did. (I actually was influential in encouraging my parents to move to a better school district for my sister for high school.) Comp sci majors from the public ivy my son attended were starting their careers with six-figure incomes at FAANG companies, but internships were crucial for that. You have had to work much harder to get your income to that level. So, I think, if your brother can starting earning six figures right out of college, it is fair for you to loan him the money, but at an interest rate lower than what the unsubsidized loans would provide.

Your parents need to join this forum!!

JackoC
Posts: 1394
Joined: Sun Aug 12, 2018 11:14 am

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by JackoC » Thu May 07, 2020 5:21 pm

Spirit Rider wrote:
Thu May 07, 2020 3:04 pm
Community college is a great idea for many majors, but in almost all cases it is far less than optimal for STEM majors.
...
Not to mention if the STEM student is at all bright, they are likely to be massively bored and under challenged in a community college.
Yeah if the brother is genuinely bright, not just in the 'all the children here in Lake Wobegone are above average' sense, positively interested in quantitative study, he should go to the best school he can get into and make the economics of paying work any way remotely possible.

Although I agree with several earlier statements that investing money you need in 2-4 yrs into stocks is a clearly bad idea. Also the full cash out mortgage route in general sounds scary. Like most cases of coming up with money, probably best to do a combination of options.

I'd just note though that in some quantitative courses of study working part time during semesters can be questionable. It was not feasible in my engineering major in college (a specialized one which UM happens to one of the few other schools to offer, but this wasn't UM). Nobody in my class could have done it, nobody even tried, especially in second halves of semesters as projects came due. Every few years there'd be somebody for whom the work was easy enough to think about working part time. So back to, how bright, actually? But working summers is doable of course.

MMiroir
Posts: 52
Joined: Sun Mar 29, 2020 12:14 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by MMiroir » Thu May 07, 2020 5:58 pm

LilyFleur wrote:
Thu May 07, 2020 4:16 pm
CSS is much more difficult to strategize for than FAFSA, it gets into areas that FAFSA does not consider. So, simply using a large cash sum to pay down the mortgage might not help. You might need to research how much home equity counts against the financial aid. There are other options, though. The parents could do a big Roth conversion this year, and use cash to pay the taxes, but that might only help him his senior year, since I think you report the income from two years prior for FAFSA, not sure about CSS. It would also depend on how much the retirement assets count against the student for CSS. Of course, if your parent's income automatically disqualifies your brother for financial aid, there is no point in moving around the assets.
These are really good points. One way to figure out Michigans financial aid formula is to go on their net price calculator and enter your parents information. If it varies significantly from the actual award, that can used as part of an appeal.

https://npc.collegeboard.org/app/umich

You can also use the NPC to determine Michigan's financial aid formula (how much they expect for people to pay out of home equity, retirement accounts and other assets) by running the NPC several times while changing one of the inputs and keeping the others static. This can be time consuming, but it is well worth it if you can figure out which assets the school considers and which they don't look at.

Also, regarding FAFSA and timing, FAFSA uses the student and parent's income from the prior calendar year to calculate need based aid starting in the Fall. The school will also require a "shapshot" of account balances. If you wait until the spring of your brothers Junior year to help out financially, your contributions will never have to reported as he will have graduated by then.

oldfort
Posts: 1067
Joined: Mon Mar 02, 2020 8:45 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by oldfort » Thu May 07, 2020 6:03 pm

JackoC wrote:
Thu May 07, 2020 5:21 pm
Spirit Rider wrote:
Thu May 07, 2020 3:04 pm
Community college is a great idea for many majors, but in almost all cases it is far less than optimal for STEM majors.
...
Not to mention if the STEM student is at all bright, they are likely to be massively bored and under challenged in a community college.
Yeah if the brother is genuinely bright, not just in the 'all the children here in Lake Wobegone are above average' sense, positively interested in quantitative study, he should go to the best school he can get into and make the economics of paying work any way remotely possible.

Although I agree with several earlier statements that investing money you need in 2-4 yrs into stocks is a clearly bad idea. Also the full cash out mortgage route in general sounds scary. Like most cases of coming up with money, probably best to do a combination of options.

I'd just note though that in some quantitative courses of study working part time during semesters can be questionable. It was not feasible in my engineering major in college (a specialized one which UM happens to one of the few other schools to offer, but this wasn't UM). Nobody in my class could have done it, nobody even tried, especially in second halves of semesters as projects came due. Every few years there'd be somebody for whom the work was easy enough to think about working part time. So back to, how bright, actually? But working summers is doable of course.

What's in the best interest of the brother isn't in the best interest of the parents. The parents have a net worth, excluding their home equity, of $400k. With the 4% rule, that amounts to $16k/year, barely at the poverty level. If you believe 3% is the new 4%, that amounts to $12k/year. The parents need to look out for their own financial interests.

User avatar
Ben Mathew
Posts: 1054
Joined: Tue Mar 13, 2018 11:41 am
Location: Seattle
Contact:

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Ben Mathew » Thu May 07, 2020 6:31 pm

The problem with a cash out refinance is that the higher interest rate applies to the entire balance, making the effective interest rate on the extra amount borrowed very high.

Parents should use some of the $85K in cash for the first couple years, and you can chip in later years (very kind of you to do so, BTW).

User avatar
LilyFleur
Posts: 1271
Joined: Fri Mar 02, 2018 10:36 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by LilyFleur » Thu May 07, 2020 6:59 pm

MMiroir wrote:
Thu May 07, 2020 5:58 pm
LilyFleur wrote:
Thu May 07, 2020 4:16 pm
CSS is much more difficult to strategize for than FAFSA, it gets into areas that FAFSA does not consider. So, simply using a large cash sum to pay down the mortgage might not help. You might need to research how much home equity counts against the financial aid. There are other options, though. The parents could do a big Roth conversion this year, and use cash to pay the taxes, but that might only help him his senior year, since I think you report the income from two years prior for FAFSA, not sure about CSS. It would also depend on how much the retirement assets count against the student for CSS. Of course, if your parent's income automatically disqualifies your brother for financial aid, there is no point in moving around the assets.
These are really good points. One way to figure out Michigans financial aid formula is to go on their net price calculator and enter your parents information. If it varies significantly from the actual award, that can used as part of an appeal.

https://npc.collegeboard.org/app/umich

You can also use the NPC to determine Michigan's financial aid formula (how much they expect for people to pay out of home equity, retirement accounts and other assets) by running the NPC several times while changing one of the inputs and keeping the others static. This can be time consuming, but it is well worth it if you can figure out which assets the school considers and which they don't look at.

Also, regarding FAFSA and timing, FAFSA uses the student and parent's income from the prior calendar year to calculate need based aid starting in the Fall. The school will also require a "shapshot" of account balances. If you wait until the spring of your brothers Junior year to help out financially, your contributions will never have to reported as he will have graduated by then.
It certainly is complicated. After my son started college, FAFSA switched to using the "prior prior" year tax data.
https://studentaid.gov/1920/help/submit-2017-tax-info

Goal33
Posts: 1270
Joined: Sun Apr 12, 2015 12:30 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Goal33 » Thu May 07, 2020 7:25 pm

Let your parents pay
A man with one watch always knows what time it is; a man with two watches is never sure.

coachd50
Posts: 346
Joined: Sun Oct 22, 2017 10:12 am

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by coachd50 » Thu May 07, 2020 7:55 pm

mc126 wrote:
Thu May 07, 2020 9:14 am
I have 3 college students in my house and 2/3 are not enjoying the online learning experience. They are not receiving the same instruction, support, or experience. If they do not return in fall or return for only a short time and universities have to return to online learning, I would feel somewhat cheated or shorted when considering what they are receiving. When you are paying full freight for education, this matters A LOT.

I'd consider deferring enrollment for one year. With the uncertainty around COVID and the possibility of continued online learning, he could wait a year and work full time to contribute a considerable amount to his own education. One year of deferment sounds like a lot when you are 18, but in the current times it could have lots of benefits.

Your parents could also explore options regarding Financial Aid strategies and legal ways to attempt to qualify. They may want to pay a consultant. Even if they tell them the same thing you say, it will be received differently when they are paying for the advice. Lots of legal strategies out there to increase chances of aid.
I definitely would consider this, particularly given the chances of remote/distance learning. The OP mentioned "college experience" -- No reason to pay that kind of money for online learning. A year would give everyone a chance to really examine the financial aspect, as well as let the little brother work and get some skin in the game.

Saving$
Posts: 1936
Joined: Sat Nov 05, 2011 8:33 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Saving$ » Thu May 07, 2020 9:59 pm

Pullupking214 wrote:
Thu May 07, 2020 8:25 am
LilyFleur wrote:
Thu May 07, 2020 12:37 am
Is there any possibility a mistake could have been made when entering information on the FAFSA?


Can your brother live at home to save money?


I think you are being such a kind sibling to want to help your brother out. I wish you the best!
Thank you for the kind words!

1) No mistakes made entering FAFSA. Parents have an EF of around $85k in cash sitting in a Chase account. Makes no sense. But they don't listen 100% to my Boglehead tendencies. It was supposed to be used to pay down the mortgage and maybe something else, but not exactly sure why it still hasn't been done yet. Seems my parents are just comfortable with low interest debt...


2) Nope. Too far away from Ann Arbor. Only option is campus housing year 1 and cheapest apartment with as many roommates as building code will allow years 2 - 4.
You are being very generous to offer to help. This would be much easier if your parents had planned for this even 1-2 years ago because you could have set things up with the SAME amount of money but such that brother would be eligible for more financial aid.
Make your offer contingent on your parents making financially responsible decisions that, at minimum include:
1. No cash out refi, because that will just be a burden later that may fall on you and your brother.
2. Take advantage of low interest rates and refi same amount to lower rate; difference in monthly payment goes 100% to brothers college costs.
3. Parents must make decisions that make brother eligible for financial aid, including direct loans. With a $90k income there is no reason this cannot be achieved.
Start by shoving max amounts possible into 401k (are they eligible? One or both? Any 403b/401a opportunities or just the standard 401k?) and Roth IRA. The 55 year old parent can put $26k into a 401k and $7,000 into a Roth; the 48 year old (if both work) can put $19k into a 401k, and $6k into a Roth. Note they can both contribute to a Roth even if only one works. This would move $39k to $58k of that $85k into accounts that would not impact ability to get FAFSA help, and concurrently put them in a better position for retirement, so less of a chance to be a burden to you and brother in the future. Keep a minimal emergency fund and put the rest into paying down on the house.
Putting the max in the max in the 401k will lower their take home income and further help brother get financial aid for subsequent years. Money is fungible so they use the $85k to offset the take home pay.
Remember, they can always remove money from a Roth with no penalty if they need the money.
4. Brother needs to take out max direct loans for which he is eligible plus earn $3-$4k year that he contributes to the costs.

If brother earns $3k-$4k year that is $14k over 4 years.
Federal Direct loans are $23.5k over 3 years (none for first year)
Parents will get $2500/year tax credit = $10k over 4 years
Parents will contribute what they save on refi - if $150/month = $8k over 4.5 years (do refi NOW)
Above totals to $55.5k, leaving $64.5k to split over 4 years, which is very doable - about $8k year each.

Agree with the advice above about making your part a loan to your brother. You can always forgive that loan later if you want.

JackoC
Posts: 1394
Joined: Sun Aug 12, 2018 11:14 am

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by JackoC » Thu May 07, 2020 10:01 pm

oldfort wrote:
Thu May 07, 2020 6:03 pm
JackoC wrote:
Thu May 07, 2020 5:21 pm
Spirit Rider wrote:
Thu May 07, 2020 3:04 pm
Community college is a great idea for many majors, but in almost all cases it is far less than optimal for STEM majors.
...
Not to mention if the STEM student is at all bright, they are likely to be massively bored and under challenged in a community college.
Yeah if the brother is genuinely bright, not just in the 'all the children here in Lake Wobegone are above average' sense, positively interested in quantitative study, he should go to the best school he can get into and make the economics of paying work any way remotely possible.

Although I agree with several earlier statements that investing money you need in 2-4 yrs into stocks is a clearly bad idea. Also the full cash out mortgage route in general sounds scary. Like most cases of coming up with money, probably best to do a combination of options.

I'd just note though that in some quantitative courses of study working part time during semesters can be questionable. It was not feasible in my engineering major in college (a specialized one which UM happens to one of the few other schools to offer, but this wasn't UM). Nobody in my class could have done it, nobody even tried, especially in second halves of semesters as projects came due. Every few years there'd be somebody for whom the work was easy enough to think about working part time. So back to, how bright, actually? But working summers is doable of course.

What's in the best interest of the brother isn't in the best interest of the parents. The parents have a net worth, excluding their home equity, of $400k. With the 4% rule, that amounts to $16k/year, barely at the poverty level. If you believe 3% is the new 4%, that amounts to $12k/year. The parents need to look out for their own financial interests.
It's really up to a parent to judge whether and when there's any situation where 'the best interest of my kid is not in my best interest', no? Realistically at some point that distinction is made by many people, but I don't see how you took my post as dealing with that issue. OP seemed to say parents want to find a way to pay. Relative to *that*, seems to me maybe splitting it among OP, parents and brother would be less financially risky. Of course the parents could reconsider and decide they don't want to help at all. So could OP. Anyone can decide to spend on themselves instead of others or vice versa with their money, obviously. I didn't take the question as asking for my two cents about how much family members should sacrifice for other family members.

Spirit Rider
Posts: 13209
Joined: Fri Mar 02, 2007 2:39 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Spirit Rider » Thu May 07, 2020 10:06 pm

MMiroir wrote:
Thu May 07, 2020 5:58 pm
Also, regarding FAFSA and timing, FAFSA uses the student and parent's income from the prior calendar year to calculate need based aid starting in the Fall. The school will also require a "snapshot" of account balances. If you wait until the spring of your brothers Junior year to help out financially, your contributions will never have to reported as he will have graduated by then.
This is not correct. Effective with the 2017/2018 school year, FAFSA has used the prior prior calendar year. For example, the 2020/2021 school year will use 2018 parental and student tax returns, and assets at time of application.

Any tuition directly paid by the brother or any other gifts 1/1 or later of the Sophomore year will not be counted for FAFSA purposes of an undergraduate degree.

Bogle_Bro
Posts: 144
Joined: Sat Mar 31, 2018 11:43 am
Location: Frisco Texas, Mortgage Banker & Attorney

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Bogle_Bro » Thu May 07, 2020 10:36 pm

rbaldini wrote:
Thu May 07, 2020 8:37 am
Why doesn’t brother just take on the loan? At least for part of it. Maybe 50%? Make him put some skin in the game, instead of just giving him free college.
Yes, this. Your brother has a 40yr career ahead of himself. He can take out loans for whatever amount would make cash flowing the rest comfortable enough that your mom will sign off.

Yall can do better than 10%..looks like Sofi is under 4% on student loan refis right now for prime borrowers

User avatar
Go Blue 99
Posts: 931
Joined: Thu Oct 09, 2008 3:42 pm

Re: Pay Sibling's Undergrad or Refinance Parent's Mortgage

Post by Go Blue 99 » Thu May 07, 2020 10:47 pm

I agree with your plan not to pursue the CC option. Since you say he is socially awkward, transferring into a huge school like U of M wouldn’t be ideal from a social aspect (assuming he cares about that).

Post Reply