<p>Taking money out of mutual funds will likely be associated with capital gains that significantly increase income,
raising the tax bracket and lowering financial aid. Would it be better to leave the money in the mutual funds and take out a second mortgage?</p>
<p>Too many unknown variables to give a meaningful answer. How much capital gains? What tax bracket? What and how much could be sold? Resulting in how big a decrease in FA? What interest rate and payment terms on the second mortgage? Etc., etc. etc.</p>
<p>My mind won’t afix on how it will work with mutual funds, as the one we have report capital gains each year anyways. With stocks, the decision to sell them or not has more to do with whether we feel it’s time to do so. But, yes, if selling some stocks or taking money out of mutual funds to meet college payment would result in reportable capital gain, not only would you be taxed on that gain (state, federal taxes at your marginal rate), but it would also increase your income which is very heavily hit in the financial aid formulas. if you take out a mortgage, you would avoid that, plus you would be lowering the market value of your home since there would be a larger lien on it–for FAFSA, not an issue, but for those schools where that is considered asset, it could. about 5% of parental assets over the protected amount go towards expected contribution at most PROFILE schools. You also get a tax deduction on the interest. Interest rates are low. </p>
<p>The downside of doing a second mortgage are the usual drawbacks in borrowing against your home, plus the fact that if you should need to borrow those funds in the future, you’ve used up that option. If you want to sell your house, and the market plummets, it also leaves you less flex. Also if you should die, you leave that additional lien against your home to your survivors, unless you take out life insurance to cover that, an additional expense. Whereas if you borrow, say through the parent Direct Loan (PLUS), though the interest rate is higher (a little under 7%), the interest may still be deductible to you, there is built in insurance if you OR the student should die, and it leaves your home equity still available if future needs develop when you no longer have the student loan option, when your student is no longer in school. </p>
<p>How much money are you needing? I hate to say it, but if it’s a huge amount…neither option is particularly good.</p>
<p>It depends, I think, Thumper, whether the money in the mutual funds was put there specifically to use for college rather than just sticking the money into a savings account in this low interest climate. I could see doing that and then finding out that taking out the money is going to reduce the financial aid due to the nature of the investment. Might be better to borrow and pay it back with the mutual fund sales when no more FAFSA need to be filed, in the last full calendar year before graduation, and also tie it in with further tax planning. </p>
<p>I appreciate the input. How much do colleges adjust financial aid year to year based on changes in Income etc. ? We’re talking about CSS schools. Two children in college; both have their initial fin aid packages-- wondering how things might change if income increases because money is taken out to pay for college. It seems crazyish.</p>
<p>Since the formulas for financial aid are not flat out percentages, but are tiered, any additional income is charged at the marginal rate. It could be as high as 40-50%. You should fool around with the NPC for the school, changing the incomes around and see what the increases are. It’s a big hit, I can assure you, from what I have seen, unless you are low income, but then any hit would be big personally.</p>
<p>My brother’ s friend has a kid in college from a first marriage, and a second family with younger children. The wife went back to work, and with child care, travel, working expenses, taxes, they did not net out all that much anyways, but they forgot about what this could do in terms of financial aid for the college kid. Not that he was getting a whole lot, but it got wiped out entirely. The formula does not take work expenses into account at all, and the additional income even on a NCP basis was a big hit The same can happen with capital gains, and also when people take out money from a protected account like a 401K. That money gets hit at the marginal contribution rate to go towards college expenses. So you lose that amount IN ADDITION to the taxes you
have to pay on it. You may well be better off borrowing until no more aid forms are needed, and then pay back the loans with the mutual fund withdrawals. You can deduct HELOC and student loan interest in most cases.</p>
<p>I appreciate your thoughts! Seems to confirm my suspicions about using the mutual funds for college.</p>