It’s the busy season for insurance and annuities hucksters who tell parents of college-bound students that spending their assets to buy an insurance policy will yield all manner of financial aid benefits. Before you start making expensive moves that end up costing more in the long run, you should figure out what will really benefit you.
First, remember that college will cost you a lot of money, probably more than you can pay out of cash flow. Families with income anywhere over $100,000 should expect their EFC based on income alone to be at least 15% of income, with that percentage rising as incomes rise (upward of $200,000, it’s closer to 25%). Very few families are able to come up with that money out of cash flow alone; most will need liquid savings available to pay for college.
Next, remember how assets are treated. Even with this year’s low asset protection allowance, your savings will cost you at most 5.64% for FAFSA purposes. That means that each additional $1,000 of savings leaves you ahead by $946.
Let’s say your family’s income (for FAFSA purposes, not AGI) is $150,000 and you have $16,000 in a 529 account, plus an amount equivalent to the asset protection allowance in your checking and savings accounts, meaning 100% of your 529 is an available asset. Your EFC would be somewhere around $31,943. Eliminating the 529 would only bring it down to $31,041: you would reduce your EFC by a little over $900, but at a cost of having $16,000 less available to pay for college. The only people who would benefit from that are the IRS who gets the tax penalty and whoever lends you the extra $4,000 you’ll need to borrow each year to pay for college.
So, when does it make sense to move parents’ money to shelter it from EFC calculations? Only when it’s money you aren’t going to use for college anyway. That includes retirement plan contributions, cash or stock contributions to charity that you are going to make anyway, and other expenses that you will incur anyway. You should not buy things– whether expensive toys or commission-generators like life insurance policies– for FAFSA purposes if you would not buy them for any other purpose.
Student money is slightly different: Because it’s assessed at higher rates (20%, with no asset protection allowance), it’s worth some arranging. In particular, any money that the student is contributing to their own college should be stashed away somewhere in the parents’ name. If the student is contributing to qualified expenses (tuition, fees, room and board), then putting it in the parents’ 529 is usually best– it gets assessed at a lower rate, and you know it will not be spent elsewhere before it’s needed. If the student is responsible for her discretionary spending, then hand it to mom and dad temporarily or spend student money on items that parents can reimburse after filing the FAFSA. In our household, that’s fall sports fees, yearbooks, choir fees, and other back-to-school expenses.