Idea to reduce EFC, what am I missing?

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tryingtothinkclearly
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Idea to reduce EFC, what am I missing?

Post by tryingtothinkclearly »

I am 48 years old, both my parents died young and I inherited some money much earlier than most. If I had instead inherited 4 years from now, my son would have gotten much more financial aid and my inheritance would have been untouched. I am not able to work and so I need to protect as much as possible for my retirement (my husband does has some retirement). I have an idea!

Background: My son will be a freshman at a top 10 University, that costs $75K but "meets all needs" and only requires the CSS Profile for the first year. Then they use their own form but I do not know those questions.

My husband owns a small S-corp, pays himself W-2, but his profit/loss from the business varies greatly each year and he never seems to have a handle on it until the taxes are done. This is stressful for me and does not allow me to properly plan.

First FAFSA 2018 taxes: Business had 50K loss and so AGI was only $42K. I had $310K in inherited assets and $70K in 529. Our home is worth about $550K and we owe $295K. The school gave him a huge grant and he won a few outside scholarships ($20/year for 4 years). I was concerned about award displacement. His school "meets all needs" but their calculated EFC was $25K higher than the federal EFC and because of this gap he was allowed to use his scholarships. The package was so wonderful that he turned down his other offers and accepted his dream school. Now I am in fear of the costs for the next 3 years.

2019 taxes: Business had a 30K gain and my husband hadn't told me he also had a 17K capital gain, so our AGI was $125K. I am receiving my last $200K inheritance check next week. I know our EFC will be a lot higher with the increased income, but also with the increased assets I'm afraid my son will lose all financial aid.

My idea: Hold the $200K check until FAFSA is complete, Oct 1. Take a $150K margin loan the last week of Sept, use it to pay down the mortgage.This way the assets on the FAFSA will be $160K in stock + $60K in 529. After FAFSA is filed, use cash the $200k inheritance and use it to pay off the margin.

I was concerned that this would increase my home equity if the school asks, but I figure that would just cause the school EFC to be higher than the federal EFC again and that gap is what has allowed my son to use his outside scholarships. I am not sure if it is smart because my mortgage rate is only 4.125% but I can invest the rest of the assets aggressively since this amount is safe. Lastly I considered taxes, because we always used to itemize but this year with the higher standard deduction it didn't help us. Unfortunately, we will still have 2 more years to file FAFSA and the assets will be higher because the margin will be paid off, but the $150K sent to the mortgage will still be shielded.

Is this plan crazy, what am I missing? Please be kind. I am happy to pay $120-140K for my son's school but if he loses all his financial aid, his bill could be over $225K which is 40% of what I have.
Flora
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Re: Idea to reduce EFC, what am I missing?

Post by Flora »

You can't exclude the $200k undeposited check you are holding until FAFSA is complete unless you want to commit financial aid fraud.
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teen persuasion
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Re: Idea to reduce EFC, what am I missing?

Post by teen persuasion »

Have you looked at the detailed FAFSA EFC calculations? https://ifap.ed.gov/sites/default/file ... ttach.pdf

That is the booklet for the previous year's FAFSA; I haven't seen the upcoming one released yet, but the process should remain similar, just the numbers generally get tweaked (though a few years back they made the switch to prior-prior year taxes, so my DS4 had to file 2 years using the same tax numbers, and the recent tax form changes necessitated a corresponding change to what qualified you for the Simplified Needs Test or EFC = 0).

Work thru the process (start on page 9) - you can see how much of your EFC comes from income, and how much from assets. With your previous low AGI, you may have qualified for the Simplified Needs Test, which skips reporting of assets when AGI < $50k (and you meet another criteria, like file 1040 but not schedule 1 with a few exceptions). The time for meaningful changes is before those taxes are filed, not after. Our biggest lever there is contributions to pre-tax retirement accounts, and HSA thru payroll only. As long as the HSA is funded thru payroll it remains invisible to the FAFSA (if funded personally, that deduction gets added back on FAFSA). Pre-tax retirement contributions also get added back to Available Income, so aren't useful to lower it except if it gets you below the SNT threshold to ignore assets.

The Institutional Methodology is a black box, every school's is different, and secret. As you say, you don't know those questions, or how they are used, so there's no real way to figure out their EFC number in advance.
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tryingtothinkclearly
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Re: Idea to reduce EFC, what am I missing?

Post by tryingtothinkclearly »

I do not have the check yet. The executor will disburse in Oct instead, as long it is not in my possession it cannot be deposited. Similar in theory to telling your boss to postpone your bonus until Jan 1, which I have read as a suggestion in many books and articles.

Thank you for the link! I have gone through the FAFSA calculations, but I'll take another look. I agree that income counts so much more than assets, that is leaving me wondering if my plan is even worth it because the savings won't be that great. We were not eligible for the Simple needs test, I think that would've made EFC Zero. Unfortunately, we do not have an HSA plan. I sure wish we did. The reason I came up with idea to pay down the mortgage was because I can't do much about the income. I think part of the increased profit from business is that we pay a large loan (used to buy the business), we are now paying more principal than interest and only interest is a deductible expense. So we are still paying the big loan payments but have less to expense on taxes (also I guess the accountant depreciates the business differently each year) and so we don't have more in our pocket even though AGI was higher in 2019.
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oldcomputerguy
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Re: Idea to reduce EFC, what am I missing?

Post by oldcomputerguy »

This topic is now in the Personal Finance forum. -- mod oldcomputerguy
"I’ve come around to this: If you’re dumb, surround yourself with smart people; and if you’re smart, surround yourself with smart people who disagree with you." (Aaron Sorkin)
niceguy7376
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Re: Idea to reduce EFC, what am I missing?

Post by niceguy7376 »

Is your husband not the father of the kid ?
Why cannot he help the family by being proactive in his business and personal (capital gains is at individual account level) income and planning?
Jack FFR1846
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Re: Idea to reduce EFC, what am I missing?

Post by Jack FFR1846 »

Your plan won't work. My older son just graduated from an expensive private engineering college. My income averaged somewhere in the $120k to $150k a year over the time he was in college. He got zip.

My observation is that FAFSA is sort of the drunk sailor of forms. It's wicked easy to go around things by paying off your mortgage, buying a couple Ferraris and then taking a break from earning till Junior year starts (or defer all of your income).

CSS is more probative and will ask about those work arounds.

College specific forms know the loop holes the above 2 miss. Yes, they ask about the value of your home, your cars, if you have any expensive jewelry or gold bars and of course retirement account balances. They ask if anyone, anywhere has a 529 for your kid or if anyone will pay a dime towards college other than you.

One thing that the college financial advisor seminars did get right.......if you do not live below the federal poverty line, you are certainly not getting anything from public colleges and for private, it depends on how much aid they give to get your kid to choose their college. It may not even be need based.
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Topic Author
tryingtothinkclearly
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Re: Idea to reduce EFC, what am I missing?

Post by tryingtothinkclearly »

Nice guy---yes he is the father. In his mind he is proactive but seems to have momentary lapses throughout a 12 month period. Talk about opposites attract! I don't think he will create a capital gain again but he said he needed cash flow in the business, so even when the accountant says you have a profit sometimes there is not available cash flow.

Jack--thank you for sharing your experience. I agree with everything you are saying, but only wrench to throw in is the $20K in outside scholarships that my son gets to use if the FAFSA EFC is $20K or more lower than the institutional EFC. Yes if we bought Ferraris, institutional would give no aid, but if FAFSA said our EFC was $20K less than Institutional said, the difference would be paid by his scholarships.
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