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Do colleges consider a parents Retirement funds when deciding on financial aid?


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#1 Ruthie

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Posted 03 November 2010 - 07:12 AM

I had someone tell me that they emptied out all their retirement accounts (IRAs, 401Ks, savings, etc etc), pay the penalties, and then put the money in a grandparent's name, so that the money would not show up as an asset in their name when the colleges were reviewing records to determine financial aid. They said colleges would expect parents to pay tuition from those funds if needed.

Is this true? Would a college actually expect a parent to pay tuition from a retirement savings? That sounds crazy to me. How would a college expect that parent to survive considering if the child is going to college, parent is not that young?

As a parent, is it even worth saving for retirement in those traditional ways if a college is just going to take it anyway?

Thanks,
Ruthie

#2 Kathy in Richmond

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Posted 03 November 2010 - 07:36 AM

The general rule is no, they don't. What they do consider is any *contributions* that you put into your 401K during the tax year they're looking at to determine your financial aid. For instance, if you're planning to send a child to college in 2011-2012, your 401K contributions during 2010 would be added back on to your 2010 total income to determine need.

Our IRA's aren't touched, either.

Now, parents' savings are fair game. They expect you to use a % of that to fund your child's college. They expect your child to use an even larger % of his or her savings.

Still, the amount most colleges expect you to afford may come as a shock. You can go to the federal FAFSA site to get an idea of your EFC (expected family contribution). They expect you'll fund college based on some combination current income, past savings, and some degree of borrowing.

Several colleges require use of the Profile financial aid form in addition to the FAFSA. Your expected contribution from the Profile may be different from that calculated from the FAFSA. The Profile asks a whole bunch of extra questions. Some colleges do ask for the amounts in your retirement savings accounts, or your home value, or.... Still, the college that did ask us this did not expect us to dip into the 401K account.

It pays to educate yourself in advance on all things financial! If you don't like what you see, you need to start looking at colleges that grant merit aid and at outside scholarships.

The book we started with (highly recommended) for learning about financing colleges is Paying for College Without Going Broke.

~Kathy

Edited by Kathy in Richmond, 03 November 2010 - 07:39 AM.


#3 FaithManor

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Posted 03 November 2010 - 08:22 AM

Shock is an understatement! With room and board, it's rare to find a college (even public) that comes under $20,000.00 a year. Financial aid is just about non-existent to families earning more than $50,000.00 per year (gross income here). So, apparently, we are all supposed to be able to afford almost half our income to go to college and for this to happen multiple times since we've got more than one child!

Dd's first choice school told us to cash out our 401K and take the penalties to pay for her education. When I asked what we were supposed to do for her brothers, they felt that we should be willing to take second and third mortgages (yeah, right....live in the real world....have any of you financial people ever actually talked to a bank about the feasibility of this? not happening even if we were willing to do it), or to sell our house and use the equity to pay for college. Of course, this was the same school that told kids if they didn't "need" student loans, to take one out anyway and buy a car with it because they could defer the interest and it was a good deal! WHAT!

So, be very careful. College financial office staff have a seriously skewed view of real world finances and are may be prone to giving very bad advice.

Faith

#4 Teachin'Mine

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Posted 03 November 2010 - 08:29 AM

Shock is an understatement! With room and board, it's rare to find a college (even public) that comes under $20,000.00 a year. Financial aid is just about non-existent to families earning more than $50,000.00 per year (gross income here). So, apparently, we are all supposed to be able to afford almost half our income to go to college and for this to happen multiple times since we've got more than one child!

Dd's first choice school told us to cash out our 401K and take the penalties to pay for her education. When I asked what we were supposed to do for her brothers, they felt that we should be willing to take second and third mortgages (yeah, right....live in the real world....have any of you financial people ever actually talked to a bank about the feasibility of this? not happening even if we were willing to do it), or to sell our house and use the equity to pay for college. Of course, this was the same school that told kids if they didn't "need" student loans, to take one out anyway and buy a car with it because they could defer the interest and it was a good deal! WHAT!

So, be very careful. College financial office staff have a seriously skewed view of real world finances and are may be prone to giving very bad advice.

Faith


Would you be willing to share what college told them that? That's outrageous. :001_huh:

#5 FaithManor

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Posted 03 November 2010 - 09:37 AM

Sure, I don't mind letting you know WHO TO AVOID!

Spring Arbor University in Spring Arbor, MI. near Jackson (south of Lansing).

Faith

#6 K-FL

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Posted 03 November 2010 - 09:57 AM

I don't know how current this is, but it's food-for-thought--

@ CollegeConfidential.com
Location: Rockville, Maryland


What a CPA is told to tell clients for financial Aid
I was just taking a college planning course as part of a CPA continuing education program. Here are some tips that they gave to tell clients:

I. Student’s Responsibilities
The student’s primary responsibility is to make themselves an attractive candidate to the various colleges.

S/he should have strong GPA and SAT/ACT scores.

The student should participate in extracurricular activities so s/he can show s/he is well rounded. Many colleges are interested in seeing students participate in a leadership role.

The student should consider schools where s/he is in the top 20 percent of the admitting class. Students in the top 20 percent of the admitting class tend to receive more gift aid.

The student should consider colleges that meet 75 to 100 percent of the student�s financial need. Each year the average percentage of financial need met by each college is published.

It is important to start early. The earlier that the parent starts saving for college, the better it is.

The student should prepare a spreadsheet to compare various awards. This will allow the student to analyze which school will give the student more free college scholarship and less college student loans, which will help reduce the cost of attendance. Several college planning Web sites have calculators to compare financial aid award packages.

II. Summary of Strategies for Maximizing Financial Aid

Appreciated assets that will be liquidated to pay for college expenses should be liquidated prior to December 31 of the student’s junior year in high school. If this is not done, the gain on the liquidation of the assets will be assessed as income in the EFC computation and the investment will be considered as an asset.

It is important to first spend the student’s investments. The student’s assets are assessed at a 35 percent rate per year, while the parent’s assets are assessed at a maximum rate of 5.64 percent. If the student’s assets are spent on college costs during the early college years, that could lead to increased financial aid in the later college years.


Assets in the grandparent's name are not clasified as assets for financial aid even if they are going to be used for the grandchild's education.

It is important to spend the parents’ investments for college expenses before borrowing money. If the parents’ assets are used to pay college costs in the early college years, it could lead to a greater availability of financial aid in the later college years.

Paying all outstanding bills and making necessary big-ticket purchases before the FAFSA is signed will reduce the amount of cash reported. Remember that a principal residence isn't counted as an asset. Thus, taking money out of your savings or checking account to pay off debt on your residence reduces the assets that are counted for financial aid.

Use cash and savings to pay off personal debt, such as credit cards, car loans, etc., which are not considered in the EFC computation.

Divorced parents should give careful consideration as to who should be the “custodial” parent during the college years. If the custodial parent is the one with the lower income, the student will qualify for more financial aid.

Parents should reposition their assets so the majority of their assets are not considered in the EFC computation. Principal residences and cash value in life insurance are not considered assets no matter how much they may be.

Parents having a business with a net worth of less than $490,000 should consider using some of their assets to make a capital investment in the business.

Consider using a flexible spending arrangement to pay for dependent care or medical expenses because these benefits are not added back for the EFC computation.

Before taking an extra part-time or summer job, students should consider if it is more beneficial to work or to qualify for more financial aid.

Don't put money in the kid’s name (Unless it is in exempt assets such as life insurance products). Kids are heavily penalized in that 35% of their assets are considered available for educational expenses each year while only 5.64% of the parents’ assets are deemed available.

Even better: take the money out of any kid's name and put it in an educational savings plan such as a section 529 tuition plan.

#7 Brilliant

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Posted 03 November 2010 - 11:01 AM

I had someone tell me that they emptied out all their retirement accounts (IRAs, 401Ks, savings, etc etc), pay the penalties, and then put the money in a grandparent's name, so that the money would not show up as an asset in their name when the colleges were reviewing records to determine financial aid.


I know this isn't what you were asking about. But this person committed fraud. I hope you don't ever trust him/her to do the right/hard thing in any situation.

#8 Gwen in VA

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Posted 03 November 2010 - 04:09 PM

Remember that a principal residence isn't counted as an asset.


That depends on the school. Many private schools use the Profile as well as the FAFSA, and the Profile asks about residence info.

Most schools that my kids applied to that only required the FAFSA and not the Profile still had a special financial form to fill out that included residence info.

#9 JenneinAZ

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Posted 03 November 2010 - 05:14 PM

As far as I know they will not go after what is currently in a 401k. They will want a part of what you would be putting into the 401k.

Further they do not get "Emergency Fund". They do not get "Saving Money to Buy a House Fund". We will need to have purchased a house before my oldest gets to college age or we will not get to use that money for a down payment. It will instead go to tuition. And our Emergency Fund is fair game too. They will want a portion of that for tuition no matter that the job market is volatile and the cost of living is scary high in SF Bay Area.

I hope we have enough time to get our house. I want my child to be challenged and college may be necessary early. But financially it would be devastating to our long term financial goals.


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