Why wouldn’t you structure a payment schedule for a lottery win that doles out the money over time? Numerous studies have pointed out that lottery winners who take the one-time payout end up in bankruptcy at a significantly higher rate than the general population. So it’s both prudent from a wealth management perspective AND is going to help with the FA conundrum.
Sorry, i’m just stuck on the stupidity of taking it all in one year when there’s an option for a structured payout…
Wouldn’t the students have to take two years off now that one year’s taxes count for 2 financial aid cycles? My daughter will start college in the fall of 2017. If I understand correctly, our 2016 income will be used to calculate our EFC for both 2017-2018 AND 2018-2019, so if we have a sudden increase in income it would increase the EFC for both years.
If the EFC is $30k now they can only expect aid from schools that meet full need, and cost more than that and if FAFSA EFC is $30k, the EFC at a CSS profile school might be significantly higher anyway. And full need met schools are very competitive to get in.
A student who has stats to get into one of those schools should have the stats to go to a school that would offer merit and might get the cost down to $20k or less.
I also don’t understand that a $100k windfall would have to be spent all on the house, there should be some money left for college.
The EFC is not what you have to pay for a school. If $30k is too much to pay for every college student in the family, find schools where they get free tuitiin and then only have to pay for room and board, which should be less thsn $15k.
@austinmshauri, 2015 taxes will be used for your D’s first year, 2017/18, prior prior year. You will do the FAFSA the first time in Oct 2016.
Ah, thanks @mommdc. That makes sense now that I think about it. Her college seems far away but it’s really not.
This is a great point. If the family wants to use the ~$100k to pay off the mortgage and pay off down debt, they need to choose colleges whose net costs are affordable for all 4 years. Or the children need to drop out of school for the 2 years the increased income would show up on the financial aid forms.
Situations like this may be part of the reason for the new 2 year window. Students will often take a gap year, and get their college’s approval to do so, but how many kids will take 2 years off and how many colleges will hold their spots for them if they do?
I think the main idea was that now you can fill out FAFSA with tax information already completed in the fall of the year your child applies to colleges, so hopefully you will know your EFC and any chance for federal aid before/at the time they apply to colleges. Colleges might then be able to send acceptance and financial aid package in the same letter.
This year is the year the change starts, 2015 taxes are being used twice, for 2016/17 FAFSA and 2017/18 FAFSA. From then on it is always the prior prior year.
Thank you for the responses.
Blossom, it is not REALLY a winning lottery ticket, without identifying them I was giving an example of a one time payout, they are making a deal with someone to sell something and they cannot structure it to take the payout over time.
This example is not about roofs or credit card debt, since people tend to judge others I wanted to make it clear that they are not spending this money on fancy cars or trips to Tahiti.
First the family wants to know if they will really be better off, negotiating this deal, how much they have to earn from the deal to come out ahead and which year will they lose FA if they make the deal. I think the refernce year question has been answered.
Although I do wonder if there is any provision in the prior prior year analysis if it is unusually high. Also, why don’t schools want the more current year if you can provide it or are willing to wait until February 2017 to know what your offer is?
I would love to hear about people who lost aid (or did not) after the first year in full needs schools because their income went up significantly. Also people whose reference (or other) year was unusually high, which could be demonstrated, what happened in the following years?
@twoinanddone I know it will either be capital gains or ordinary income not both but either way they will pay 30-40% in taxes (have high state taxes), since I am not an accountant I cannot predict which way the transaction will be charachterized nor does it really matter. That is shocking about the $200 but a perfect example why they are concerned.
I was consolidating in my example about EFC, for one kid it is a total of 30k, for two kids each one pays 60% of that so about 40- 45k TOTAL for both assuming no windfall income. It can be easily predicted, just go to the NPC for potential schools (or D1s) and see how it changes when her sibling is listed at over18 and in college.
After the windflall the TOTAL EFC will be over $120k, so the parents in my example will be paying $85k more for school and 30-40k in taxes. So that $100K they earn will end up costing them $115K, which seems like a ridiculous result. Also, since they are using prior prior year, they will get the money in 2016 but will not have to spend it until 2018, which also seems crazy since by then it will count 2x because if they do the responsible thing and save it instead of using it to pay down credit cards! or get the squirrels out of their roof! it will count as an asset as well and cost them an extra 8k in aid going forward! (I know, pay off the credit cards in 2016 and reborrow when you are full pay in 2018). just giving the example.
K1 is going to a Top 20 school. K2 and K3 are equally bright and work hard, within a half step of K1. They will be accepted at a meets full needs college. From the prospective of these parents, they cannot tell K2 and K3 you cannot go to the same school as your sister because we made more money this year?!
@austinmshauri, each tax year won’t count for 2, just 2015. After that,you will use the prior prior, so you’ll use 2016 once and 2017 once. Also, OP, while the tax look back is 2 years, the asset reporting stays the same so you DON’T want to save the asset for 2 years as come October, or when ever you complete FAFSA, you’ll have to report it. If you don’t spent it until 2018, you’ll have reported it twice as an asset.
@blossom, some lotto payouts don’t get the option of a payout over time, usually only the multimillion lotto do, but even those that do more often take the lump sum option as, if you don’t spent it all, you can better invest it and get a higher return than the state. Plus the state is not a good debtor. Illinois stopped paying out for a while. What can you do to collect? Nothing. One could buy an annuity, but then that’s an asset to be reported. The OP set the parameters for this hypothetical, and stated they needed the money in a lump sum for good reason.
I think this family should not take the money because they are so worried about it. If they have 3 kids smart enough to go to a full needs met school one of them should be smart enough to figure this out by calling the school and asking.
Thank you, yes that was my point about the asset staying on their books until 2018, they will lose about 8k a year in aid just holding it, that was why I suggested clearing their credit cards and prepaying the taxes as soon as they get the money, with the idea that worst case they can reborrow on their credit cards or take out a loan if they have to in 2018, their credit is fine.
For K2 and K3 there is no school to call yet and I am not sure it would be a good idea to call D1’s if they have not received the money and may never make this deal. It will raise a red flag on her file for something that may never happen.
Thank you, @twoinanddone. This was our first year filing (for our son) which is why I thought each tax year was used for two. I can see why OP would be confused. They don’t make it easy, do they?
But schools don’t award money based on things that never happen. Call k1 school. Ask if her EFC will be the same if there is a one time rise in income, if her siblings start attending schools. They don’t red flag files.
If the K2 and K3 are not even in school yet, you don’t know if those schools will have a ‘reference year.’ I think you are assuming they will, and most of us are confused because FA is most often reevaluated every year. No ‘reference year’.
Having trouble believing that the family of modest means has/does fully contribute to their 401K? Wouldn’t that be a good place to stash a troublesome asset??? And if in fact this is a piece of intellectual property that they are in the process of selling (an invention? an App) , I’m also trying to envision this exact scenario… why not license it with a future income stream instead of taking the 100K? why not sell it to a third party who creates a corporation and puts one of the parents on the payroll, doles out a salary for the next 10 years (including imputed interest on the sale) to cover the value ?
So maybe I’m a dolt, and I’m neither an accountant NOR a financial aid officer, but I have never seen a scenario where earning more, getting more, being hit by more dough is a bad thing. The only scenario I’ve seen involved fraud… which clearly the OP isn’t trying to engage in.
Net of taxes, net of expenses, even with kids close together, I’m having trouble seeing how more money is a bad thing. License the damn app, take the proceeds over ten years as a licensing fee, avoid the one time “hit” of 100k showing up in the bank…
Is it even established for sure that CSS profile will follow the FAFSA in prior prior year reporting?
Nobody can tell you how this will impact the FA, because it’s up to the schools to calculate what they expect a family to pay, and how heavily they would factor in the windfall. Even meet need schools can vary a lot in net price.
@blossom, I gave you an example of how earning more was not possible for my friend. Her daughter needed to qualify for medicaid to receive medical care and other services. If friend earned more than $xx, those benefits would be lost. So to earn say $45k instead of $40k, she’d lose thousands and thousands in benefits. In her case, her daughter would not have survived or friend would have had to declare bankruptcy in the first year. She didn’t play the lottery because even winning a million dollars would not have helped her financially.
There are many cases where earning more doesn’t help. A single who earns $90k rather than $80k you’d thin 2ould be better off by $10k, right? Well, first you pay taxes on it, so let’s say $2500 in taxes (fica, state, federal). I have two in school so would lose $5000 in AOTC. If it also causes a loss of other FA, say a state grant or a school grant or even Pell (if the cards are right, and there were some deductions for high taxes or other Pell allowed considerations), that $10k bonus or windfall is gone without any benefit to me at all. I’m in the same place I started, $80k.
This earn more/ lose more is very common when trying to get people off welfare. If they earn less than $40k, for example, they qualify for food stamps, medical care, heating bill assistance, free cell phones, free transportation, etc etc, once they make too much, they lose all those benefits, so making a little more hurts their bottom line. Making a lot more helps, making a little more, which is usually how people move up in the working world, actually hurts their wallets.
@mommdc that is a good point. If I were a CSS school I think I would want the MOST information I can get so I benefit from the FAFSA going prior prior year and IDOC staying prior year! This is really what they are afraid of, that it will cause them to lose out on more than one year of FA.
Blossom, it cannot be paid out. It is a one time thing. It will always be a one time thing and cannot be structured any other way, their only negotiation is whether they accept the offer and how much the final offer will be and if after everything is done it really does not benefit them, they will either have to negotiate more or not take the deal. They already contribute to their 401k and their problem is NOT spending down the asset! Also, 401k contributions are added back in when calculating AGI for the CSS, so while contributing to their 401k may help preserve the asset, it will not reduce the EFC in the year this hits. This may help the tax bite but only if it is ordinary income instead of a capital gain.
Yes it is a bizarre result if they lose money but as per the example above from California, it can happen, that is why they are thinking about it before jumping and just accepting what at first looks like a good offer. I do not think I ever realized how screwed a certain segment of the population is when it comes to paying for college without merit aid, especially those living in expensive states (which for most is not a choice).
@twoinanddone, I knew it was possible but I thought it was unusual, I did not realize it was so common. Thanks for all the great examples. Wonder what can be done to fix the system.
Can someone please explain this “reference year” concept? In my experience, the college asks the family to re-file the Fafsa and supply tax returns every year.
As I said upthread, this family needs to send a letter of special circumstances to each college FA office and point out two things:
Who said anything about medical debt? The OP used a roof and credit card debt as an example and then stated:
Medical Debt? Nope.
The reference year is the year used by the school to determine your initial FA offer when they accept you. Even at meet full needs schools this award can be adjusted a little depending on whether they really want you and what other offers you have. Especially since different schools use different formulas, for example not all include home equity in the calculation of assets. Some limit it to 2x income (which would also screw this family in the windfall year). So Dartmouth, for example, says on its web site it will consider other offers from peer schools based on need.
Presumably you are most attractive to a school before you commit so that is likely to be your best offer.
Here is an example of why the first year is important. Note this family will not be applying to UIUC
http://talk.collegeconfidential.com/discussion/comment/19456108/#Comment_19456108
Wrapping my mind around selling something (other than an organ- which is illegal in every state in the US as far as I know) where you couldn’t incorporate, have the product/item/piece of intellectual property be sold as a product which was developed by the corporation and have the proceeds held as assets of the corporation, and then have one of the parents be employed by said corporation and take the payout as a salary as the inventor or “head creative” or “director of product development”.
Drilling or mining rights? These people need a lawyer anyway- those transactions are complicated. It’s the “take it or leave it”, one time only aspect of the transaction that doesn’t feel right- these people might get taken advantage of in a far bigger way than just financial aid implications.
I was executor of an estate with a significant royalty component…it was complicated because the future income stream was counted as an asset of the estate, so I needed valuation expertise on the actual intellectual property, AND because after the estate was settled, the heirs would each be getting taxable income for as long as there was value…
Lots of good advice from the pros on different ways to treat the asset and what the consequences would be both short term (estate taxes) and long term (income in perpetuity? or at least a long time?) for the heirs.