Can Moving Assets to Tax Deferred Annuity Help Get More Student Financial Aid?

Hi,
We are a middle class family. We live modestly - doing without fancy vacations and new cars - and have been able to save nicely over the years. Because of the savings we have, we will most likely get no financial aid. Can moving part of the money from the savings account into a tax deferred annuity, help us get some financial aid for our first child who should be entering college fall of 2017? I thought this would be considered a retirement account and would not be reported on the FAFSA, but would it still be needed to be reported in the PROFILE? I have just started looking into this college finance planning thing and I would be greatly appreciative of any advice or tips from parents who are more experienced. We have a 2nd child who is expected to enter college fall of 2020.

So…let me guess, a ‘college financial planner’ is advising you to purchase his tax deferred annuity product so that your assets convert into something that is not considered on the FAFSA etc.

You need to run as fast as you can from this idea.

http://www.forbes.com/sites/troyonink/2014/11/04/consumers-beware-the-truth-about-life-insurance-annuities-and-college-financial-aid/

If you are being encouraged to buy an annuity by a college planner…or financial planner…run for the hills.

How much in assets are we talking about here? Your assets are only assessed at 5.6% of their value for fafsa purposes.

What is your family income? The family contribution is largely driven by income, not assets. Doing all these financial gymnastics might not matter at all.

Is you kiddo only applying to colleges that guarantee to meet full need for all students? If not, all,this financial moving around might not matter at all…not at all.

Have you actually run the Net Price Calculators on various college’s websites? You need to do that asap. And you need to do it with a couple of different scenarios just so you see the impact that moving assets around will have on your net cost of different colleges.

Blossom’s first commandment which is largely ignored is “don’t do anything for the sake of financial aid that doesn’t make sense in the context of your overall financial health”.

This means- don’t buy a teenager a brand new car, if you weren’t planning on doing so, just because a financial advisor told you that converting cash to a car means sheltering 20 or 25K in income from being tapped for college. Once you’ve done that you are out 25K and your kid owns a car that he or she can’t afford to insure, park, or take to college.

This means- don’t start buying a bunch of luxury products you don’t want or need because the Cartier watch won’t show up on your FAFSA but after your kid is done with college you can sell the watch and recoup your investment… plus it will appreciate! Guess what- new watches DEPRECIATE the day you walk out of the store. You’ll get 50% on the dollar if you are lucky, or can try to sell it on Ebay for marginally more than that.

Annuities have high fees and are generally great investments- for the person who gets a commission selling them.

If you are modest income with nice savings you may be surprised that some of the colleges on your list in fact will give you aid. Don’t pay an “expert” until you’ve checked the college’s own aid calculators.

Listen to the posters above. They know what they’re talking about.

Re: Paying for college.

First, do you know how much you CAN spend per year on college? If so, how much?

Second, is your child a strong student (strong GPA and test scores). If so, have him or her apply where stats will give large merit scholarships.

How much more in financial aid do you hope to gain by moving your assets around?

I had originally calculated the EPC on Big Future. Thank you, blossom for suggesting I do the NPC for each of the colleges we are interested in. I just did two and at one institution we would get zero financial aid. At another - we kick in $51K and they award us $8K per year (but there is no guarantee). The idea to move assets to tax deferred annuity was mine. No one is pushing us to do it. But there are annuities out there for which costs are comparable to mutual funds. I was researching the tax deferred annuities because I wanted to reduce our taxes. But anyway, I see this is not a yes or no answer. Adding to the complication is that you lose the safety of knowing you won’t lose the principal once you go into variable annuities. We haven’t gotten test scores yet, but hopefully they’ll be high and our daughter can keep her grades up because merit awards may be the only real hope as mom2kidsincollege suggests. For the most part, a college education is not worth a quarter of a million dollars - at least not to me (hence the willingness to do some financial gymnastics).

I did a lot of research about variable annuities a few years ago, after my husband mentioned to me that his father had moved a large portion (hundreds of thousands of dollars) of his very safe employer-held investments into annuities. What I discovered was that at the time, investment advisors were themselves being encouraged to push older people into annuities because they make a lot of money for the advisor (3 to 5 percent commission off the top, paid all in the first year). However, the restrictions on withdrawals make them inappropriate for older people with their limited life expectancies, so blatantly inappropriate that laws were passed in some states making it illegal to sell these products to people over a certain age. My in-laws were 80 when they bought the annuities and the provisions of the annuities they bought prohibited them, for the first 8 to 10 years, from withdrawing more than approximately 5 percent of the total value per year unless my father-in-law had to go into a nursing home or died. It is my impression that after authorities and lawmakers wised up to the use of these products to prey on older people, the investment advisors began turning to other potential customer bases, parents of prospective college students among them. I just urge you to be very careful with putting your money in any investment that limits its accessibility to you.

One thing you could try with the Net Price Calculators is run the same one twice - with and without the hundreds of thousands (?) you could move to the annuity and see the difference. The financial gymnastics may not make much of a difference, given the risk.

You mention EPC on Big Future - do you mean EFC?

Some folks use EPC…expected parent contribution. This is their wording…nothing official that I’ve seen!

Moving something into a tax deferred annuity doesn’t get it out of the CSS or FAFSA unless it is a qualified retirement vehicle. Otherwise it is an asset, it’s just that it is now an uninsured asset.

I thought that tax deferred annuities are an insurance product that is not considered to be an asset for FAFSA purposes.

From the above cited article annuities are counted for CSS. TIAA-CREF has a no-load universal life product that may achieve what you want. YMMV

It can make sense to use some of your free cash to pay off your mortgage or do any upcoming house repairs (new roof, etc) now, or replace vehicles that are near the end of their life.

You could investigate which types of annuities/insurance products are not counted for CSS Profile or FAFSA. For example, I don’t believe the cash value of life insurance policies is counted on either. So you could possibly pump some money into a single premium whole life policy that has liberal cash-out provisions.

Before you do any of this though, keep in mind that there are only a handful of schools that meet full need, and an even fewer number that meet full need without loans or by capping loans, and they are all extremely difficult to get in.

So let’s say you moved some money around and shaved $20K off of your EFC, and lowered it from $50K to $30K. At most schools, financial aid for this $20K will most likely consist of loans, or you will get gapped (that is, you are offered nothing, not even loans). IOW, all of these financial shenanigans will most likely get you nothing, and now your money is tied up somewhere where you can’t quickly get it.

If you don’t want to spend a significant part of your savings on college, a more productive strategy might be to have your kids target schools where they can get substantial merit aid.

It is important to get real about how much you really, truly are ready, willing, and able to pay for your kid’s education, and under what conditions. If your figure is less than the NPC indicates you would be expected to pay, it is OK to take the institution off the list. Yes, you can tell your kid that any place that would cost more than $X will be a no-go.

However, for this to work best, you and your spouse do need to be on the same page about the money, and you need to get the message across to your kid before the application list gets made.