Many people call themselves “financial advisors” when they should in fact be called sales people. A number of these types are active right now telling parents of high school juniors and seniors that they should buy annuities or life insurance to help themselves in the financial aid process. This “investment” is not as helpful as you might think.
On the one hand, moving taxable investments to a life insurance or annuity policy does remove them as assets from the FAFSA. But remember how the FAFSA treats assets: below the Asset Protection Allowance they’re exempt from the calculation, and above it, they only count 5.64%. If you had $25,000 in savings and an APA of $19,000, those assets only increase your EFC by $338. So you haven’t saved a whole lot by moving those assets.
On the other hand, if you move those assets to an insurance policy, they’re no longer available to pay for college. This means you either need to increase your payments from cash flow or borrow to pay for college. In today’s low interest rate environment, your policy may have a guaranteed rate of return of 2.5% or less. Student loans have interest rates starting at 4.29%. There’s a gap there.
You need to remember the most important rule of financial aid: There is no requirement that your need be met, and even if it is, the package is likely to include a loan component. So trying to game the system through tying up your money in a non-assessed investment has a high likelihood of backfiring.
And there’s an important rule of financial services at play here too: Annuities and life insurance policies are popular in no small measure because they generate big commissions for the people selling them. Whether or not they are good choices for you is a different issue than whether or not they’re good for financial aid purposes.
