institutional method - asset calculations

Paying for College
1

<p>Hi,</p>

<p>Have a son who just entered college this year, also have a second son, who will be apply for college this year.</p>

<p>I have approximately 100k in liquid assets (which, from what i read, the institutional method would exclude approximately 50k, based on my family size). I have a line of equity credit of 50k. I also can borrow money using investment margin. I need to access 30k this year.</p>

<p>Can anyone advise as to what to do, asset wise, to maximize my financial aid for the coming year? Ideally i would like to borrow against the home equity account, but am unsure if the institutional method would count the debt against the liquid asset (net the two). Otherwise, I would prefer to use the investment margin. Lastly, I would liquidate, but then capital gains come into the equation.</p>

<p>On a second note, since I’ve begun reading the boards (great feedback by the way), I’ve noticed the concept of “need gap”, especially in the context of out of state schools. I thought (obviously wrongly) that all schools covered financial need thru loans, work study, ect. Need gap seems to be a big black hole when trying to figure out which schools my second son should apply to. Any suggestions as to what to consider in trying to figure out “need gap”?</p>

<p>Thanks.</p>

2

<p>I don’t think debt counts against the assets. The asset would still count and debt would be ignored unless it’s for a medical reason.</p>

<p>BTW…some people find that moving money around, etc, actually doesn’t do any good unless the child/children are attending full need - low loan schools.</p>

<p>What was son #1’s FAFSA EFC and CSS contribution and what did his aid package look like? Does he go to a full need school? Will child #2 go to a full need school?</p>

3

<p>Investment debt offsets the investment value, so that the net worth of an investment is value minus debt. It’s different from consumer debt (mortgages, credit card debt, etc), which is not reported on either FAFSA or Profile. So if you were to borrow on margin, that would reduce your reported investment assets, assuming the money that you’ve borrowed is spent before you fill out financial aid forms rather than simply deposited into a checking account.</p>

<p>If you have a home equity loan, then the amount that you borrow against it would reduce the equity in your home, which is not reported on FAFSA but is on Profile.</p>

<p>Probably the first question is what is the interest rate after taxes of the 2 forms of borrowing, and how does that compare to the capital gains taxes you’d be paying if you were to sell part of your investments. It might be advantageous to take capital gains this year anyway, due to the possibility of much higher capital gains taxes in 2011. If you’re not in a high tax bracket, then the capital gains tax consideration is less important. If you believe the future gain of the investment will outweigh the cost of borrowing on margin, it might be best to borrow rather than liquidate.</p>

<p>Finally, what is your path for repayment of the debt? Can you pay from current income, or would you have to liquidate your investments at some point in order to repay?</p>

4

<p>Thanks vballmom, yes, eventually I will need to liquidate the assets, draw down the home equity line of credit (within 2 years), and refinance my home as well.</p>

<p>I am really looking to maximize the financial aid package for the coming year. The cheapest funding, given current rates, would be the equity line of credit (2.5%). However, I prefer to keep the investments as opposed to liquidating them. Borrowing on margin would allow me to do this, but I guess, the higher interest i pay on margin (7%) would negate the benefit of the additional financial aid (just thought of that). Think I’m beginning to answer my own question - seems like selling the assets would be the cheapest alternative, ignoring potential market returns. Since I will need to sell my assets eventually, the capital gains will be realized eventually, so it becomes less of an issue (assuming congress keeps the tax laws the same) - heh, thanks, good to talk thru some of this. If I read your post correctly, the home equity line of credit (in the institutional method) would not offset the assets, making it the worse choice.</p>

<p>mom2collegekids,</p>

<p>Currently, my oldest is a freshman in Cornell. His efc (assuming this was institutional) was 2,350 and mine was 37,000. With grants/scholarships, he should graduate with 25k in loans.</p>

<p>Figuring out what my second son will cost is the difficult issue. He is considering schools such as Villanova and Boston College. From what I understand, the efc for 2 kids is calculated such that I will be responsible for .6 x efc per kid. If that is correct, I would expect my overall efc cash outlay will be $44.4k where my second child would get a package:</p>

<p>Total tuition 55000/year
my efc unadjusted 37000
his need 18000</p>

<p>where my efc actual $22200, and hopefully, there is some grant money in the need portion.</p>

<p>In my simple world, I thought if he went to an an out of state public school, where tuition and room is approximately $40k, his package would be </p>

<p>Total tuition 40000
my efc unadjusted 37000
his need 3000</p>

<p>but now I am hearing about “need gap” - any thoughts? It’s funny, paralyzed as to whether he should apply to out of state schools or not. Major will be business.</p>

<p>thanks again for the replies.</p>

5

<p>Actually the HELOC will offset your home equity, so if you have $100K equity in your home, and withdraw $30K from your HELOC, your equity would now be $70K. The catch is that it’s not always obvious how Profile schools use home equity in their need-based aid calculations, so you can’t be sure that a reduced home equity will translate into more need-based aid. You’d also need to have spent that $30K because if it’s sitting in a bank account it’s an asset that will be reportable on both FAFSA and Profile.</p>

<p>Having said that, it’s very possible that your 2.5% HELOC is your best choice for funding college. That’s a great rate, and your other investments can continue to grow over the 2-3 years they remain fully invested (assuming the market continues to rise - how is your crystal ball looking these days?) On the downside, banks are pulling HELOCs out from under people with little warning, so there’s a risk those funds won’t be available to you after all.</p>

<p>When your two sons are in college at the same time, your FAFSA EFC will be cut in approximately half for each son. So your older son might find his need-based aid increased. Where do you get the .6 x EFC per kid? That’s not necessarily the case - it could very well be .5 x total EFC, depending on the school. There have been some schools where the EFC per kid doesn’t drop very much with a 2nd kid in college, but for FAFSA-only schools that shouldn’t be the case.</p>

6

<p>*In my simple world, I thought if he went to an an out of state public school, where tuition and room is approximately $40k, his package would be</p>

<p>Total tuition 40000
my efc unadjusted 37000
his need 3000</p>

<p>but now I am hearing about “need gap” - any thoughts? It’s funny, paralyzed as to whether he should apply to out of state schools or not. Major will be business.*</p>

<p>The $3k need from the OOS public would be covered with a fed loan. ( and…as you know…even Cornell puts fed loans in their packages. )</p>

<p>Actually, applying to the “right” OOS publics might not be a bad route if your son qualified for a good sized merit scholarship at an OOS school…
**
What are his stats???**</p>

<p>For instance…</p>

<p>OOS school COA = 40,000
EFC = $37,000
Need - $3000</p>

<p>But…if he were to get - say - a $20k merit scholarship from the school, then your “new” family contribution would only be $20k. That’s a huge drop in your out of pocket costs.</p>

<p>What are your son’s stats and what OOS publics were you considering?</p>