The ethics of positioning yourself for the best possible financial aid

Paying for College
1

Something I read on another thread got me thinking. A poster knew someone who had chosen to receive substantial real estate as her divorce settlement rather than money because it wouldn’t show up on the kid’s financial aid application, and her child would qualify for need-based aid. This was later referred to as despicable, amongst other things.

I’m not saying I agree or disagree, but what are peoples’ thoughts on this? Particularly, how does this differ ethically from choosing, say, to put your income into a retirement plan rather than a 529 so the assets aren’t touched? (I know the income would still count, perhaps that’s a bad example). What about gifting cash to grandparents with the expectation it will be gifted back later? Taking merit money when you can well afford to be full pay? I’ve seen ALL of these referred to as taking funds from others who could use it more. Where do people draw the line?

Again, this is not about me, but it’s something I find very interesting and I wonder if anyone else has given it thought.

2

I don’t think there is anything wrong with accepting merit even if you can afford full pay.
The other scenarios, seem that while they are probably legal, they are perhaps unethical and they do bother me. Others may say they are akin to simply taking advantage of tax loopholes.
What I do hope - is that for kids who get significant aid, whether it be merit or financial - that down the line they donate to their colleges so others may have the same opportunities they had.

3

“A poster knew someone who had chosen to receive substantial real estate as her divorce settlement rather than money because it wouldn’t show up on the kid’s financial aid application, and her child would qualify for need-based aid.” It was SUPPOSED to show up on the kid’s financial aid application. The value of all assets must be reported, with the exception of primary home and qualified retirement plans.

If you have enough money to be able to play games with it, you probably aren’t going to receive need based aid at a FAFSA-only school … and the Profile schools that have a lot of money to give are very savvy at figuring out who has what to spend. Yes, some people hit the financial aid jackpot by moving things around … but so few that it isn’t worth worrying about.

4

Do you mean her primary home? If not, then those holdings will affect FAFSA.

However, if her kid is applying to CSS profile schools, then all will count.

People who do some of these financial gymnastics often find they were for naught.

5

What about legally putting the kid with the parent who has lower income? I thought it was recommended here very often…

6

I would hope that parents would decide with whom a child should live based on what would be the best living situation for the student …

7

Some items I think are fine while others are not. Gifting to a grandparent with the expectation to have it gifted back is wrong. It may even be illegal. Other items I think are fine (BTW - not all Profile schools look at home equity). I personally try to position myself to receive the most aid possible. I think my take on it is schools charge so much to attend, the schools have created an environment where if I didn’t do at least some financial gymnastics, my children couldn’t attend the colleges they are attending.

8

Women are often encouraged to take their settlement as real estate.

Five years later the ex-husband is living in a modest condo or renting an apartment and rebuilding his equity and has enough cash flow to fund his new life. The ex-wife discovers that property taxes, repairs, heating oil, and snow shoveling cost three times what she thought, she hasn’t saved a penny AND is cutting into her cash reserves or taken out a Heloc to keep the lights on.

The fact that there may be a moderate benefit from a financial aid perspective isn’t much help if taking over the family home is a dumb financial move. And if the mom ends up under water on the mortgage, or saddled with huge carrying costs, that extra 3K a year in aid doesn’t look so sweet, does it?

9

Who gets to be the judge that someone is scamming the system by living in a $200k house and getting free lunch? Who gets to judge that the child should spend one extra night with the parent who has a new spouse, a great job, and provides all the support for the child so that the child isn’t gaming the system by listing the other parent on the FAFSA.

The rules are written for the majority, and if a few can figure out a way to use them to their advantage, now 2 tax years before filing the first FAFSA, I don’t have a problem with it. If a single parent realizes that taking a $1000 raise or working 10 hours of overtime will eliminate the AOTC, I’m good with them turning that money down to qualify for more tax credits. We allow it for solar power systems and better windows on expensive houses where the owners could have afforded them with the credits, we allow credits for buying electric cars, why not for education?

I really have no issue with it at all. I don’t want schools deciding I should have a higher paying job, that I should file a 1040 rather than a 1040A, that I shouldn’t give money to charity because I should have saved that for college, that I should give an equal amount to each of my kids for college. Those are my decisions, and if I follow the FAFSA and tax rules the money should be granted as stated in the rules.

10

If there’s an expectation that the money will come back to you, it’s not a legitimate gift. It’s a temporary asset transfer done with the intention of getting increased need-based financial aid. More bluntly, it’s hiding assets, which in this context is unethical and also likely illegal.

11

I agree with those who are pointing out that a lot of the things that are “supposed to help with financial aid” don’t really help, or don’t help enough to cover the costs. (for example the commission and fees on an insurance policy that doesn’t have to be reported on the FAFSA may be much higher than the gain in financial aid, if there even is any)

I think ethically, we need to be willing to pay for our kids’ educations. I cannot fathom the lessons a parent thinks a child will learn by paying their own way through school when a parent has money but just won’t share it.

On the other hand, the financial aid formulas are broken. There are so many people who just do not have their EFC, or perhaps they have it but are not comfortable with the risks involved in paying it (selling the family home and using it towards college, taking a loan when future income is not assured, etc).

Students are young and optimistic and sign up for loans with a bright vision of their futures. Parents who have lived a while know that bad things happen to good people and become more risk averse. Things like health issues, expensive accidents, natural disasters, and unemployment or underemployment (loss of overtime or bonuses etc). Maybe our own parents or aunts/uncles were forced into early retirement when they were laid off and there was age discrimination when they tried to find a new job.

I don’t think that trying to lower or pay less than your EFC is unethical in and of itself. The EFC as it exists today is not a fair standard for all families. But the ethical line depends on how much money you have, and how and why you are doing something to try to spend less than that.

My current college kid is full pay EFC but is going to a merit aid school. I was perfectly willing to be full-pay at the state U, but not at the private LAC she is attending due to the price tag.

Are there kids out there who “needed it more” - yeah. Did they apply to my kid’s school and did they get admitted with enough aid to attend? I don’t know. I don’t choose how the LAC decides to allocate merit and need-based aid. Is my daughter’s scholarship a win-win for her and the school? Yes, or the school wouldn’t have offered it. Is it a win for society as a whole? That part I don’t know.

I didn’t make any particular effort to hide assets from the formulas, but I steered the college list towards schools that either we could afford or that had a track record of awarding merit that would get the price tag within the budget. And this particular school is not an Ivy or anything where I am keeping a needy child out of the best opportunities in the country.

But, yeah - articulating the differences between “playing the game,” “playing the game as hard as you can,” and “cheating” is a hard one. I have much more sympathy with families that either never had the money or had it but spent it on something like surviving an adverse event without going bankrupt than I do with people making elaborate plans to work around the system to get more aid. Charitable or retirement contributions that reduce your income tax are one thing, an offshore shell company is completely different. But, I can’t really articulate a coherent philosophy. It’s not “anything goes,” but it’s not “ignore the rules of the game” either.

12

There are companies out there whose sole purpose is to help you reposition your assets for FA purposes. Beware-they bill themselves as “college planning advisors”. I have a senior and have been contacted multiple times about local “seminars”… surprisingly, our high school even hosted one of these seminars and they are a “community partner” on our website :frowning: … Of course, I attended out of curiosity, it reminded me of a snake oil salesman (sorry in advance if I’ve offended anyone)… one of the first pieces of documentation they ask for is your recent tax return. I’m sure it’s all legal, but maybe not ethical for most of us.

13

There is nothing illegal about buying an annuity.

Is it a good investment? Well- that depends. But it is ALWAYS a good investment for the person selling you the annuity- they get their commission regardless of whether they sold you the right product for your needs or not.

It’s also completely ethical to buy an annuity. But for MOST parents trying to position their assets as best they can for college financial aid it is a dumb investment- the downside as an asset is typically greater than the upside in financial aid.

but it’s neither illegal or unethical to be dumb in America.

14

“Taking merit aid when you can afford to be full pay” … How is that an example of anything unethical or shady?

Don’t take what you earn. Is that the country we have become?? Give me a break.

15

Is it wrong for someone to put their kids in public K-12 when they can afford private?

is it wrong for someone to put their kids in state univs when they can afford private?

16

^^or take the athletic scholarship when they can pay (Snoopdog, McCaffrey, the Olympic swimmers)? Or attend a service academy when someone else could really appreciate the slot?

It’s not all about the money. Some of it is about earning the scholarship, the position, the money through hard work. No one expects taxpayers to not take a deduction just because they can afford to pay the tax. Everyone has the same opportunity to use coupons at the grocery store or take the senior discount at the movies, even if they can afford to pay the full price.

But I really don’t think there are that many people who know enough about financial aid and how to game the system to worry about it. The rules are published and if there is a work-a-round, use it.

17

Great stuff. @twoinanddone really summed up my personal feelings: everyone has the same opportunity to use coupons at the grocery store, etc…and no one expects taxpayers not to take a deduction.

I encouraged my own kids to chase merit and aggressively saved for retirement rather than college, and I believe that was the right thing to do. They’re at great private schools where they’re happy and thriving and we’re covering everything except for fed loans, and I won’t pretend we’re paying full price.

It’s definitely an interesting conversation.

18

Is it a widely available deduction or is it something more esoteric and only available to a few? To me there’s a difference between a 529 plan and asking if your family business could pay you only in ISO options and you take no salary?

19

But why should it matter if it is widely available or if someone discovered a way to benefit from tax breaks or a FAFSA rule or a particularly good 529 plan? It has been recommended here on CC to have grandparents or others wanting to contribute to college wait until spring of sophomore years so the gift will not have to be reported on FAFSA. Not everyone can do that (or has grandparents wanting to contribute), so does that make it unethical or unfair for those (few) who can? I don’t think so.

20

What’s despicable is that the Ivy League colleges take billions in federal aid (aka, taxpayer money) despite their enormous endowments. Once they stop taking taxpayer money, despite their “ability to pay,” then we can fairly consider whether students with the perceived “ability to pay” should take merit aid.