529 vs reducing FAFSA assets

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mtnrider
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529 vs reducing FAFSA assets

Post by mtnrider » Thu May 14, 2020 11:49 pm

I haven't seen this exact question posted yet so here goes. My wife and I are able to put a large amount of money away each year into pre-tax and roth 401ks. (I have a plan with mega back door roth so can save ~35k per year in roth alone plus traditional pre-tax). Our first child will attend college in 10 years.
If we simply pay our primary residence down and keep shoveling money almost exclusively into 401ks, we would likely look like we have very little assets to contribute for college expenses on the FAFSA and would receive much more financial aid (I think?).

Might this be a better route than investing in a 529 account which I think shows up as an asset on the FAFSA? Any feedback on risks/thoughts would be appreciated.

Cheers

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FiveK
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Re: 529 vs reducing FAFSA assets

Post by FiveK » Fri May 15, 2020 12:11 am

If your income will be high, your assets might be irrelevant. E.g., see
How FAFSA Calculates Your EFC | Road2College, How Parent Income Can Impact Your Federal Student Aid, etc., for some background, and Estimate Your Aid | Federal Student Aid for one estimating tool.

marcopolo
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Re: 529 vs reducing FAFSA assets

Post by marcopolo » Fri May 15, 2020 3:13 am

I think the general advice on 529 plans, and what we did, was to max out all other tax-advantaged accounts (401k, IRA/Roth, HSA, etc.) before vontributing to 529.
Once in a while you get shown the light, in the strangest of places if you look at it right.

Jack FFR1846
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Re: 529 vs reducing FAFSA assets

Post by Jack FFR1846 » Fri May 15, 2020 7:13 am

Yes, ok.

This is what parents think until they fill out the FAFSA form. Your assets are of little importance if you earn more than the poverty level in wages. Your kids will get Stafford loans and nothing more. The lower ranked colleges will offer more merit aid. You have to understand that these days, "aid" means high interest loans with a 1.04% front end load. It no longer means grants that many of us pre-Reagan students received.
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snowman
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Re: 529 vs reducing FAFSA assets

Post by snowman » Fri May 15, 2020 7:47 am

There are tons of books on the subject, plus there is collegeconfidential website. I would start there and educate myself on how college aid works. It will help you plan ahead in ways you may not have thought of. However, as it relates to your current question, you are high income family, so you are not getting any financial aid through FAFSA, no matter what your assets are. If you were low income family with typical amount of assets, you could qualify for Pell grant, up to about $6K/year, plus some subsidized loans, plus work study program. That's the extent of federal financial aid through FAFSA.

SchruteB&B
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Re: 529 vs reducing FAFSA assets

Post by SchruteB&B » Fri May 15, 2020 7:53 am

mtnrider wrote:
Thu May 14, 2020 11:49 pm
I haven't seen this exact question posted yet so here goes. My wife and I are able to put a large amount of money away each year into pre-tax and roth 401ks. (I have a plan with mega back door roth so can save ~35k per year in roth alone plus traditional pre-tax). Our first child will attend college in 10 years.
If we simply pay our primary residence down and keep shoveling money almost exclusively into 401ks, we would likely look like we have very little assets to contribute for college expenses on the FAFSA and would receive much more financial aid (I think?).

Might this be a better route than investing in a 529 account which I think shows up as an asset on the FAFSA? Any feedback on risks/thoughts would be appreciated.

Cheers
Pick a college you would like your child to attend. Google that college name and Net Price Calculator. Run it with both scenarios. See what it tells you. As others have noted, financial aid is largely driven by income, not assets.

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TomatoTomahto
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Re: 529 vs reducing FAFSA assets

Post by TomatoTomahto » Fri May 15, 2020 8:03 am

The need based colleges will assume (correctly imo) that what you’re socking away in mega backdoor could be spent on college expenses.

The merit based colleges will give your kids money if your kids perform demonstrably higher than their typical student, i.e., they are paying to raise their stats. That applies to academics and sports. Unless you can raise the school’s stats in one way or another, forget merit aid. Your family can decide if that’s worth it.
Okay, I get it; I won't be political or controversial. The Earth is flat.

Jack FFR1846
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Re: 529 vs reducing FAFSA assets

Post by Jack FFR1846 » Fri May 15, 2020 8:15 am

Something to be very careful about. You may run into so called "College Financial Planners" who will give seminars openly and at schools. The seminars are actually pretty informative (where I learned clearly that the federal poverty line is the limit where kids get need based aid) but their bread and butter is siphoning listeners in for a one on one where they pitch a "product" that can hide your assets from FAFSA. This undisclosed product is a whole life policy. What they do is generate reports showing what it will cost you after all aid to attend a number of colleges you'd likely be choosing from. What they push under the rug is that with all your millions cleverly hidden in an insurance product, your income is going to blow your chance for grant money out the window. Even more fun, if the college is a private one, they may also require CSS, which asks for insurance cash value. So you'd have hidden money that you now need to disclose anyways. At least the "College Financial Planner" gets to replace his silver BMW with a new blue BMW.
Bogle: Smart Beta is stupid

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TomatoTomahto
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Re: 529 vs reducing FAFSA assets

Post by TomatoTomahto » Fri May 15, 2020 8:31 am

Jack FFR1846 wrote:
Fri May 15, 2020 8:15 am
...The seminars are actually pretty informative (where I learned clearly that the federal poverty line is the limit where kids get need based aid) ...
I generally agree with Jack, but Yale, for example, gives financial aid to families well above the Federal poverty line. Yale is among the more generous colleges (I think Princeton is #1 for that), but below are some of Yale’s aid bullets. Of course, your kid would have to get into one of those generous schools :D
All of Yale’s undergraduate financial aid is awarded on the basis of financial need.
Yale meets 100% of demonstrated financial need for all admitted students regardless of citizenship or immigration status. This includes undocumented students living in the US, with or without DACA status.
Yale does not expect students to take out loans. Instead, Yale financial aid awards includes a Yale Scholarship, a parent contribution, and a small student contribution.
Families whose total gross income is less than $75,000 (with typical assets) are not expected to make a financial contribution towards their child’s Yale education.
Families earning between $75,000 and $200,000 (with typical assets) contribute a percentage of their yearly income towards their child’s Yale education, on a sliding scale that begins at 1% and moves toward 20%.
There is no income cutoff for financial aid awards. Some families with over $200,000 in annual income receive need-based aid from Yale.
Okay, I get it; I won't be political or controversial. The Earth is flat.

SimonJester
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Re: 529 vs reducing FAFSA assets

Post by SimonJester » Fri May 15, 2020 11:02 am

Jack FFR1846 wrote:
Fri May 15, 2020 7:13 am
Yes, ok.

This is what parents think until they fill out the FAFSA form. Your assets are of little importance if you earn more than the poverty level in wages. Your kids will get Stafford loans and nothing more. The lower ranked colleges will offer more merit aid. You have to understand that these days, "aid" means high interest loans with a 1.04% front end load. It no longer means grants that many of us pre-Reagan students received.
This +1000. You will fill out the FAFSA and send it to your chosen school, who will then say your student get $2000 in federal loans and the rest needs to come from either your 529, other cash on hand, or a parent plus loan. One of the most vile loans out there...

But who known what colleges are going to look like in 10 years, heck we dont even know what is going to happen in 3 months...
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

MMiroir
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Re: 529 vs reducing FAFSA assets

Post by MMiroir » Fri May 15, 2020 1:57 pm

marcopolo wrote:
Fri May 15, 2020 3:13 am
I think the general advice on 529 plans, and what we did, was to max out all other tax-advantaged accounts (401k, IRA/Roth, HSA, etc.) before vontributing to 529.
This is good advice. The OP is 10 years out before college hits, so they probably don't know what kind of schools their kids will be interested in or be able to get into, but if you are upper middle class, the FAFSA only really applies to a small sliver of colleges. This generally includes Ivy league and equivalents (Northwestern, Stanford, Hopkins, MIT, etc.) with large endowments and very low admittance rates. Unless you see your kid going to one of these schools, gaming the FAFSA won't help much unless your family income is significantly less than $150,000 or so, or if you have more than one kid in college at a time.

At the OP's kids age, the best investment would be to spend more time and effort increasing their academic resume. For many students, if they can maintain a 3.5 GPA and score a 30 or more on the ACT, there are some very good merit scholarships out there that can cover much of the cost of college and be a much better investment than a 529. They are also more likely to attend a better college, graduate from a more challenging major and get a better job.

cshell2
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Re: 529 vs reducing FAFSA assets

Post by cshell2 » Fri May 15, 2020 2:18 pm

FiveK wrote:
Fri May 15, 2020 12:11 am
If your income will be high, your assets might be irrelevant. E.g., see
How FAFSA Calculates Your EFC | Road2College, How Parent Income Can Impact Your Federal Student Aid, etc., for some background, and Estimate Your Aid | Federal Student Aid for one estimating tool.
+1

Income is hit much harder on FAFSA than assets, and you're going to have to add back in all that money you stuck into tax-preferred space as untaxed income when they calculate financial aid. While I think sheltering as much of your assets as you can is a good idea, if you're making 150K/year you're not getting any need-based aid anyhow, so you better have some savings you can use as well.

MMiroir
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Re: 529 vs reducing FAFSA assets

Post by MMiroir » Fri May 15, 2020 3:25 pm

cshell2 wrote:
Fri May 15, 2020 2:18 pm
Income is hit much harder on FAFSA than assets, and you're going to have to add back in all that money you stuck into tax-preferred space as untaxed income when they calculate financial aid. While I think sheltering as much of your assets as you can is a good idea, if you're making 150K/year you're not getting any need-based aid anyhow, so you better have some savings you can use as well.
It depends on the school. One of the metrics that schools use to advertise themselves is the percentage of students that qualify for need based aid. The higher the better from the schools perspective. As a result, some schools are offering small amounts of need based aid for families making well over $200,000 just so they can advertise "more than XX percent receive financial aid."

cshell2
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Re: 529 vs reducing FAFSA assets

Post by cshell2 » Fri May 15, 2020 3:56 pm

MMiroir wrote:
Fri May 15, 2020 3:25 pm
cshell2 wrote:
Fri May 15, 2020 2:18 pm
Income is hit much harder on FAFSA than assets, and you're going to have to add back in all that money you stuck into tax-preferred space as untaxed income when they calculate financial aid. While I think sheltering as much of your assets as you can is a good idea, if you're making 150K/year you're not getting any need-based aid anyhow, so you better have some savings you can use as well.
It depends on the school. One of the metrics that schools use to advertise themselves is the percentage of students that qualify for need based aid. The higher the better from the schools perspective. As a result, some schools are offering small amounts of need based aid for families making well over $200,000 just so they can advertise "more than XX percent receive financial aid."
I just threw that number out there because you're probably going to end up with an EFC north of 40K on that income alone which pretty much excludes aid at any state school. Federal aid is pretty much nil at around the 6K EFC mark.

As for private schools padding stats. One of my coworkers was bragging up his kid getting a huge scholarship from the local private school bringing it almost to the cost of the public. I said EVERYONE gets a big scholarship there and we ran the net price calculator with a hypothetical student entering with a 2.5 GPA and 18 ACT and they still awarded this person that probably shouldn't even be in college a 10K incoming merit scholarship. :oops: My coworker's son had received nearly double that so I wasn't knocking his scholarship, just pointing out how much they overinflate their sticker price just to give out big scholarships.

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LilyFleur
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Re: 529 vs reducing FAFSA assets

Post by LilyFleur » Fri May 15, 2020 5:36 pm

SchruteB&B wrote:
Fri May 15, 2020 7:53 am
mtnrider wrote:
Thu May 14, 2020 11:49 pm
I haven't seen this exact question posted yet so here goes. My wife and I are able to put a large amount of money away each year into pre-tax and roth 401ks. (I have a plan with mega back door roth so can save ~35k per year in roth alone plus traditional pre-tax). Our first child will attend college in 10 years.
If we simply pay our primary residence down and keep shoveling money almost exclusively into 401ks, we would likely look like we have very little assets to contribute for college expenses on the FAFSA and would receive much more financial aid (I think?).

Might this be a better route than investing in a 529 account which I think shows up as an asset on the FAFSA? Any feedback on risks/thoughts would be appreciated.

Cheers
Pick a college you would like your child to attend. Google that college name and Net Price Calculator. Run it with both scenarios. See what it tells you. As others have noted, financial aid is largely driven by income, not assets.
The lower-earning parent in a divorce might qualify based on income for FAFSA. In that case, assets would be important.

Also, FAFSA is not the only method of reporting for financial aid. The CSS profile is required by many private universities and flagship state schools. Unlike the FAFSA, house equity may count against you on the CSS.

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mtnrider
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Re: 529 vs reducing FAFSA assets

Post by mtnrider » Fri May 15, 2020 6:56 pm

Good grief this thread was informative. Thanks to all who posted. I received university grants in the nineties but my family didn't have a lot of money. I clearly didn't think through the effect of income on the FAFSA-affected aid my kids might receive. Thanks to all who posted. I have some research to do.

I wish I'd found this website much earlier.

s

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