Using MEC to shelter assets, pay for college

Hi.
We’ve been talking to a college financial advisor who turns out to be an insurance agent, which I’ve learned is not unusual. He has recommended a cash-out refi, which I think is good advice, as interest rates are much lower than for private loans. But he has also recommended putting the money in a modified endowment contract (MEC) which is a life insurance contract. I’m skeptical. Has anyone done this? (It would not be reportable for FAFSA, but might be on the CSS…)

An insurance agent who is doubling as a “college financial advisor” should be a huge warning sign. The fact that he is recommending a life insurance contract is even more concerning. Ask him how much he will make off of any insurance contract that you might buy through him. My advice: run away, and not slowly.

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There are situations where leveraging life insurance might be a good vehicle for college- a minor who is orphaned; a kid with parents who are past retirement age and have a paid up whole policy, etc. Since we don’t know the specifics of your situation- age, other assets, other liabilities, how many kids you have and their ages, etc. none of us can give you advice on your particular situation.

BUT- yes, it is unusual. It might be “usual” among insurance agents, whose fees are very high and are tied to the answer being “buy insurance” but it is not typical among financial aid advisors where I live-- in fact, I’ve never heard of this. It is a clear conflict of interest for an advisor to be recommending the products where he or she stands to gain a substantial fee. There is a well respected insurance agent in my town whose advice to EVERYONE who reads some article online about buying insurance to pay for college is “Live below your means. Fund your 401K. Fund a 529 plan. If there’s anything leftover, put the money in a no-fee index fund. You’ll thank me in 30 years”.

My standard advice- do not do ANYTHING for financial aid which does not make sense given the rest of your portfolio. I have seen families forgo 25 and 30K in upside to get an extra $1200 in aid. I’ve seen families increase their tax burden substantially (down the road, but cash is cash) for the sake of an extra $1500 in aid. And I’ve seen families tie up assets for a really long time only to discover that financial aid policies/cut-off’s have changed, and then they are both cash-poor AND are getting no or minimal aid, just when they need it most.

Your kid is going to college- great. Your fridge will also die on the hottest day of the year. Your muffler will fall off a car which is a month out of warranty. All the reasons you need to engage in smart financial planning will still be relevant when your kid is in college. And you’ll either qualify for aid or not- but tying up your funds in a high fee/low payout financial product is the kind of decision which can bite you in the rear for years to come.

Agree with Belknap- put on your running shoes and get out.

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The problem here is really, why would you want to shelter assets? if you have the assets to pay for college, then the whole thing is shady. There are plenty of people who truly can’t pay for college or don’t have assets. Trying to hide yours so your kid might be able to get financial aid. Also, if you make over 100k, make sure you understand the whole financial aid situation anyway. You also have to report all your tax return information from the year before your kid goes to college. So if your kid is a senior this year, you’ll be sending in your tax return for 2020, so refinancing now won’t necessarily help when they wonder where all that cash went. Also, god forbid something happens to you (not death) and you now have a huge mortage, and a large life insurance policy and need cash? You have no equity in your home and if you need to borrow from your life insurance, you’re be paying high rates. Sounds like the only one who wins here is the life insurance agent. Walk away. Actually, run as fast as you can. On a home refi you’ll also pay a lot for your closing costs. Assets from a house are not the only assets looked at for FAFSA either, so if you have other asests, they’ll be looked at too, so it would really suck for you to try to pull this one over on FAFSA and then not get anything either and the only winner is the insurance agent.

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Thanks, everyone, for the comments and advice. We are not going to do the mec thing, because I’m totally put-off that this guy’s whole purpose was to get us to buy an insurance account; and I’ve been doing research and still can’t figure the thing out. As for the refi, it’s actually no-cost and we can use it as well to pay off my husband’s student loans, which have an exorbitant interest rate. I also can’t imagine that we won’t need some loans for college (we don’t have the assets, which is why we’re thinking the refi), and refi rates are so much lower than private loans.

Yep…if his main purpose was to get you to buy his insurance product….running for the hills was the right thing to do.

How much in loans do you think you will need to pay for undergrad school for your kiddo? As a caution…you haven’t yet paid off your husband’s college loans, right? Do you really want to leverage more loans for your student?

Folks here might be able to direct you to some more affordable options.

My free advice…don’t take our parent anything loans for undergrad school.

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Having recently filled out the CSS, I can tell you that it is an EXTREMELY detailed, in-depth financial biopsy. I do vaguely remember some question about value of life insurance policies that were also investment vehicles. If you have it, they will see it… unless you’re doing something underhanded to hide money.

If your husband still has college loans, seems as if you would likely be in a position to be eligible for financial aid. Unless there are very good reasons not to pay off this higher interest college debt of his, it seems that reducing the equity in your home by paying off his college loans is a good idea. The only way it would not be a good idea to do this is if the loan is solely in his name, and you’re on your way to divorcing, or he is about to become disabled, or worse, deceased, in which case federal student loans would be forgiven. If you pay off the loan with money from a refi, you lose those protections. But I’m assuming that these situations are not applicable for you.

By paying off his student loans, you will appear to have less in the way of assets. I don’t think that the CSS asks about parents’ remaining student debt, or balance on credit cards, or other debt. They did want to know about the current equity in cars - how much you paid for the car, how much it was worth now, how much you owed on them.

Most schools that give significant financial aid in the form of grants also require the CSS from both parents, and if divorced and remarried, from the step-parents, too.

Tough to get around this while remaining honest. This is the reason why most flagship state U’s have become so selective, and yet are overenrolled, year after year. So many parents whose kid doesn’t qualify for financial aid are realizing that their flagship state U for around 30K/yr is the best option, vs paying rack rate for prestigious private schools that do not give merit money, or others that give it only very rarely.

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OP- before you even think about the refi- take an evening to get a full picture of your finances.

Do you have life insurance for this and any other minor children? Do you have disability insurance from your jobs? Do you have an IRA or 401K, or anything at all put away for retirement?

Cashing out on the house to pay off your education loans may be a great idea. But if at the end of the day, you then go ahead and take out MORE loans- either consumer loans, or ed loans for your kid, then where are you going to live if (god forbid) you lose your job, have to sell the house and find something less expensive? How many years of work left until retirement- and how are you going to live with no income coming in (check out your social security benefits before answering this question- it’s often less than people think).

So get a full picture before doing anything. And if it means your kid has to find an affordable, no-parent loan option for college- well, isn’t that better than dragging the college loans into the NEXT generation, whereby your grandkids have to worry about your kid paying off his loans before they get to college???

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A cash out refi to pay off high rate student loans is reasonable. Also a reasonable way to finance college if borrowing will be needed. However, make sure it is truly no cost. Some brokers will pitch a “no cost” refi that rolls costs into the mortgage. Obviously, that is not no cost even though it may be no money out of pocket.

Glad you decided against the insurance product.

If your child is considering schools that provide need-based aid, you should run the price calculators and play around with different home equity and savings numbers to understand what effect this might have. At schools that don’t consider home equity but are pretty good at sniffing out savings disguised as life insurance, the advisor’s advice would reduce your aid.

In general, income is the most important variable determining aid. Savings isn’t usually the biggest factor for most people. But if it’s a factor, the best place to “shelter” savings from aid calculations is in retirement accounts, then home equity (for schools that don’t consider it), and then in spending down savings to reduce anticipated future expenses (paying down debt, slightly accelerating necessary home maintenance such as roofing, etc.). For those with significant assets, it’s tough to move the needle much by doing these things. As mentioned, it almost never makes sense to make financial planning decisions solely for financial aid reasons.

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I actually filled out a bunch of EFCs for schools my son is interested in with the different numbers for savings and mortgage loan, i.e., with or without cash from refi. For one school, the difference was about $5,000; for another, a couple hundred.

We could put some of the money into our IRAs, and then use it if it’s really necessary. While it would be taxed, there’s no penalty for early withdrawal for education expenses.

Thanks for all the responses; I really appreciate it.

Remember, the financial aid forms will add back in as income any contributions to tax sheltered retirement accounts you make. So what retirement accounts would offer significant shelter? There is a dollar limit to what one can put in a Roth IRA annually.

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Financial aid forms add back income contributed to tax sheltered accounts for the specific financial year the form is asking about - not all financial contributions to your IRA, 401(k), HSA, etc.

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Right….so for the contributions are added in s income for the tax year of the FAFSA being completed.

But also keep in mind, those retirement contributions aren’t completely liquid assets. In many cases, there is a penalty for withdrawing early, and if tax deferred, taxes will be owed on money withdrawn. So make sure you read the fine print if you plan to “shelter” money in retirement accounts…which are meant as long term retirement accounts, not a drop box to hide money from the financial aid departments.

Roth IRA’s allow you to take qualified education expenses and there are no penalties. Also, you can withdraw contributions to a Roth IRA at any time for any reason without penalty. So, when some people have a traditional IRA the best vehicle at that point is to convert it to a Roth. However, you do need to have a Roth for 5 years to avoid any penalties so for some it may be too late. There are some great articles about this and also on the IRS website one can read about this.

But bottom line, no one should sacrifice retirement savings to pay for college. You can’t get that money back once it’s gone.

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This!

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For parents who have been maxing out retirement savings for decades, I would say the shelter is pretty significant. Sure, employee contributions made during the relevant years are added back in on the financial aid forms. Employer contributions are not, often including S Corp contributions to pension plans such as a SEP.

My point, though, was that the three most significant asset areas in which one can shelter assets from financial aid do not include insurance products.