<p>Let’s suppose you own a “widget” (it really doesn’t matter what it is – could be a car, boat, whatever). The widget costs X, lets say $200K. And the seller of the widget is offering you a great deal – no money down and 0% interest. You have the cash in the bank, but you can invest it at 10%. So you take the widget seller up on the deal because you can make an extra $20K per year by investing the money and paying of the 0% loan.</p>
<p>From a finaid perspective, you now have $200K in the bank (that really needs to be used to pay off the loan) and $20K in annual income that you would not have if you bought the widget for cash. But you are going to be assessed for finaid based on your assets, and you will show $200K that you really don’t have, and the extra $20K in income, which I think is fair. </p>
<p>Are you better off just paying cash for the widget? You won’t show the money as an asset and you won’t have the income, but your finaid will be much lower. Please don’t get hung up on the $200K and 10%, they are just examples.</p>
<p>It sounds like you don’t own the widget, you’re just thinking about purchasing it and are considering your financing options.</p>
<p>The marginal increase in EFC due to cash and other investment assets is 5.6%, after an age-based asset protection allowance. If your cash/investment assets are below the asset protection allowance, then there’s no difference in having the cash vs locking it up in a widget. If your cash/investment assets are greater than the asset protection allowance, then your net increase in EFC is (cash - allowance) x .056. In your case, assuming an asset protection allowance of $50K, having cash would increase your EFC by $8400. If you’re earning $20K by keeping the cash, then in my opinion you’re better off with cash and a slightly higher EFC than by locking up that cash in an illiquid asset. </p>
<p>But that’s just the math; the decision is up to you.</p>
<p>Thanks; </p>
<p>Can you tell me what the asset protection allowance is? It would seem to me that would be based on all your assets. If your assets are over the allowance, then the EFC would go up $200K * 5.6% or $11,200, but your income is also higher by $20K. I am sure you are assessed on the EFC on your income as well? What is the % of income towards EFC?</p>
<p>The % of income that goes to the EFC increases as income increases, maxing out at 47% of income over a certain level.</p>
<p>The maximum of unprotected assets after allowances is 5.6%. The allowances are based on # of parents and the age of the older parent. </p>
<p>The numbers for both can be fond in the EFC formula. Google 2012-2013 EFC formula.</p>
<p>Also it may matter what the widget is. If it is a reportable asset then whether you have the cash as an asset or the widget as an asset, the asset will have the same effect on your EFC.</p>
<p>Also keep in mind that just because your EFC is lower does not mean you will get extra non loan aid. It depends on the school and their policies. Many do not meet full need, many that meet full need will include loans. </p>
<p>From another point of view, if the seller is willing to finance the widget with 0% interest, you might be able to get the widget at a lower price for cash. From an accounting standpoint there really is no “interest free”. Sellers actually should record the sale at a discounted price to account for a reasonable amount of interest based on current interest rates.</p>
<p>Does it make sense to approach a fin aid office and say, what is my aid package if I keep the cash and take the loan and my EFC is A, and what is my package if I pay cash and my EFC is B? Can you talk to a fin aid office about these types of things?</p>
<p>The asset protection allowance is based on the older parent’s age. If the older parent is 50, the allowance is $46,600. Look at Table A5 here:
<a href=“http://ifap.ed.gov/efcformulaguide/attachments/082511EFCFormulaGuide1213.pdf[/url]”>http://ifap.ed.gov/efcformulaguide/attachments/082511EFCFormulaGuide1213.pdf</a></p>
<p>Before talking to a financial aid office, spend some time understanding the formula in the guide linked above. Fill it out with different income and asset scenarios to see what the effect of each has on your total EFC.</p>
<p>vballmom – good advice. can I go to the govt FAFSA website and input the different scenarios to calculate each different EFC?</p>
<p>There are various online EFC calculators but they may or may not be up to date. I created my own spreadsheet with the formula - it wasn’t difficult to do.</p>