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FAFSA Strategies

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mbamatric
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FAFSA Strategies [#permalink] New post   29 Jan 2009, 14:54
With FAFSA deadlines coming up, wanted to get an idea of the strategies any of you are employing. I know there's a knowledge vault of this stuff started by Kryzak from last year, but just thought I'd start one for 2009. Specifically, I'm thinking of:

1) Paying down any existing undergrad loans. With about $10K outstanding, paying it thru my existing cash reserves will lower my cash balance to report. Also, since I won't have any income for 2 years, the tax benefits of interest deductions on these loans will be moot (and weren't much to begin with, seeing as how I had a really low rate on these loans).

2) Maxing out contributions to IRAs. Since IRA balances aren't factored into your net worth calculation, I'm thinking it would be beneficial to move cash to IRA's to lower cash and net worth balances. Also, my understanding is that you can take money out of the IRA at any time without an early withdrawal penalty if it's used to pay down educational expenses. So, it's not like I won't be able to access this money at any time.

3) I know this is a really shady tactic, but I've read (Montauk's book being one) that one may want to transfer cash to your parents for a couple years to have less funds tied to your name for FAFSA purposes. Now, I'm really unsure as to whether or not this is even legal, and wouldn't want to risk doing so if it isn't. But, not sure if many students do this or not and if schools really care....

Thoughts on any of these strategies?
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Re: FAFSA Strategies [#permalink] New post   29 Jan 2009, 14:58
What are the deadlines?
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Re: FAFSA Strategies [#permalink] New post   29 Jan 2009, 16:08
Hard deadlines aren't for a while (I'm not sure the exact date) but most schools are recommending you get them in by the end of February. Sooner the better...
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Re: FAFSA Strategies [#permalink] New post   29 Jan 2009, 16:11
Not until June, at least for federal aid:

https://www.fafsa.ed.gov/before003a.htm
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Re: FAFSA Strategies [#permalink] New post   29 Jan 2009, 16:14
mbamatric wrote:
Hard deadlines aren't for a while (I'm not sure the exact date) but most schools are recommending you get them in by the end of February. Sooner the better...


What about R2 applicants who won't get a decision until March?
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Re: FAFSA Strategies [#permalink] New post   29 Jan 2009, 16:26
mbamatric wrote:

2) Maxing out contributions to IRAs. Since IRA balances aren't factored into your net worth calculation, I'm thinking it would be beneficial to move cash to IRA's to lower cash and net worth balances. Also, my understanding is that you can take money out of the IRA at any time without an early withdrawal penalty if it's used to pay down educational expenses. So, it's not like I won't be able to access this money at any time.


Don't you have to include that in Section 4, Question 42 on the FAFSA worksheet?:
As of today, what is the net worth of your (and your spouse’s) investments, including real estate (not your home)?

mbamatric wrote:
3) I know this is a really shady tactic, but I've read (Montauk's book being one) that one may want to transfer cash to your parents for a couple years to have less funds tied to your name for FAFSA purposes. Now, I'm really unsure as to whether or not this is even legal, and wouldn't want to risk doing so if it isn't. But, not sure if many students do this or not and if schools really care....

Thoughts on any of these strategies?


Depends if you qualify as an independent. I've definitely heard of people doing it if they are in other situations where having a low net worth may be beneficial (aka about to get sued). Probably something not worth messing around with unless you think it will make a big, big difference.
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Re: FAFSA Strategies [#permalink] New post   29 Jan 2009, 16:52
Don't we have to file our 2008 Tax returns first? I still don't have my W2 from my bankrupt employer... :lol:
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Re: FAFSA Strategies [#permalink] New post   29 Jan 2009, 16:54
falibay wrote:
Don't we have to file our 2008 Tax returns first? I still don't have my W2 from my bankrupt employer... :lol:


Same here! (except for the bankrupt part) And yes, you have to file your 2008 taxes before submitting for FASFA.
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Re: FAFSA Strategies [#permalink] New post   29 Jan 2009, 17:10
bostonsparky wrote:
mbamatric wrote:

2) Maxing out contributions to IRAs. Since IRA balances aren't factored into your net worth calculation, I'm thinking it would be beneficial to move cash to IRA's to lower cash and net worth balances. Also, my understanding is that you can take money out of the IRA at any time without an early withdrawal penalty if it's used to pay down educational expenses. So, it's not like I won't be able to access this money at any time.


Don't you have to include that in Section 4, Question 42 on the FAFSA worksheet?:
As of today, what is the net worth of your (and your spouse’s) investments, including real estate (not your home)?

mbamatric wrote:
3) I know this is a really shady tactic, but I've read (Montauk's book being one) that one may want to transfer cash to your parents for a couple years to have less funds tied to your name for FAFSA purposes. Now, I'm really unsure as to whether or not this is even legal, and wouldn't want to risk doing so if it isn't. But, not sure if many students do this or not and if schools really care....

Thoughts on any of these strategies?


Depends if you qualify as an independent. I've definitely heard of people doing it if they are in other situations where having a low net worth may be beneficial (aka about to get sued). Probably something not worth messing around with unless you think it will make a big, big difference.


As far as IRA goes, they specifically say that retirement accounts are not included, so it would serve as a bit of a safe-haven for your cash...
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Re: FAFSA Strategies [#permalink] New post   29 Jan 2009, 18:05
mbamatric wrote:
As far as IRA goes, they specifically say that retirement accounts are not included, so it would serve as a bit of a safe-haven for your cash...


Not sure how many big savers are around here, but the Roth IRA is a great place to stash some assets before fillingn out the FAFSA. If you haven't already done so, you can contribute $5,000 for 2008 (before April 15) and another $5,000 for 2009. The best part is you can take out your contibutions whenever you want without penalty (dividends and cap gains can't be touched until you are 59 1/2, though).
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Re: FAFSA Strategies [#permalink] New post   29 Jan 2009, 18:06
ryguy904 wrote:
mbamatric wrote:
As far as IRA goes, they specifically say that retirement accounts are not included, so it would serve as a bit of a safe-haven for your cash...


Not sure how many big savers are around here, but the Roth IRA is a great place to stash some assets before fillingn out the FAFSA. If you haven't already done so, you can contribute $5,000 for 2008 (before April 15) and another $5,000 for 2009. The best part is you can take out your contibutions whenever you want without penalty (dividends and cap gains can't be touched until you are 59 1/2, though).


But Roth IRA is post tax though. That doesn't help you for your FAFSA filings.
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Re: FAFSA Strategies [#permalink] New post   29 Jan 2009, 18:12
GoBruins wrote:
ryguy904 wrote:
mbamatric wrote:
As far as IRA goes, they specifically say that retirement accounts are not included, so it would serve as a bit of a safe-haven for your cash...


Not sure how many big savers are around here, but the Roth IRA is a great place to stash some assets before fillingn out the FAFSA. If you haven't already done so, you can contribute $5,000 for 2008 (before April 15) and another $5,000 for 2009. The best part is you can take out your contibutions whenever you want without penalty (dividends and cap gains can't be touched until you are 59 1/2, though).


But Roth IRA is post tax though. That doesn't help you for your FAFSA filings.


Retirement assets don't count when FAFSA determines your "school paying ability" assets. So here's how it works: you can have a) $10,000 in your checking/savings account or b) $10,000 in your Roth IRA. Option B will not be included in your assets (i.e., what they would say one could potentially contribute to pay for school).
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Re: FAFSA Strategies [#permalink] New post   29 Jan 2009, 18:15
ryguy904 wrote:
Not sure how many big savers are around here, but the Roth IRA is a great place to stash some assets before fillingn out the FAFSA. If you haven't already done so, you can contribute $5,000 for 2008 (before April 15) and another $5,000 for 2009. The best part is you can take out your contibutions whenever you want without penalty (dividends and cap gains can't be touched until you are 59 1/2, though).


But Roth IRA is post tax though. That doesn't help you for your FAFSA filings.[/quote]

Retirement assets don't count when FAFSA determines your "school paying ability" assets. So here's how it works: you can have a) $10,000 in your checking/savings account or b) $10,000 in your Roth IRA. Option B will not be included in your assets (i.e., what they would say one could potentially contribute to pay for school).[/quote]


Well without the tax benefit, you might as well just have 10,000 in cash. why not just do a regular IRA. You can withdraw without penalty because of the exception for Higher Education. Also when you do pay taxes on the withdrawl NEXT YEAR, the rate will be lower since your income should have dropped conciderably.
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Re: FAFSA Strategies [#permalink] New post   29 Jan 2009, 18:43
GoBruins wrote:
ryguy904 wrote:
Not sure how many big savers are around here, but the Roth IRA is a great place to stash some assets before fillingn out the FAFSA. If you haven't already done so, you can contribute $5,000 for 2008 (before April 15) and another $5,000 for 2009. The best part is you can take out your contibutions whenever you want without penalty (dividends and cap gains can't be touched until you are 59 1/2, though).


GoBruins wrote:
But Roth IRA is post tax though. That doesn't help you for your FAFSA filings.


ryguy904 wrote:
Retirement assets don't count when FAFSA determines your "school paying ability" assets. So here's how it works: you can have a) $10,000 in your checking/savings account or b) $10,000 in your Roth IRA. Option B will not be included in your assets (i.e., what they would say one could potentially contribute to pay for school).


GoBruins wrote:
Well without the tax benefit, you might as well just have 10,000 in cash. why not just do a regular IRA. You can withdraw without penalty because of the exception for Higher Education. Also when you do pay taxes on the withdrawl NEXT YEAR, the rate will be lower since your income should have dropped conciderably.


I hear what your saying, but it's not the route that I would go. Again, although the Roth doesn't have a tax benefit (1-something that I'm not eligible for anyway given my income level and 2-maxmimum benfit of about $1,000 tax deduction, assuming 25% tax rate), again my point was that a Roth shields the assets. So when you say, "might as well have cash" - well NO, because cash will be included as an asset, and a Roth won't. Horse beaten. Now that that is cleared up, I'm not going to get into a Roth v. Traditional IRA debate. There are hundreds of articles on the internet that have already done that. Just my two post-tax pennies, though. :)
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Re: FAFSA Strategies [#permalink] New post   29 Jan 2009, 20:09
Yup, I think I'm gonna max out my Roth IRA contributions this year to shield those assets from FAFSA and then simply pull them out, penalty free, when I need to repay my student loans...
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Re: FAFSA Strategies [#permalink] New post   29 Jan 2009, 20:25
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Play around with various scenarios and see how they affect financial aid eligibility before you submit your FAFSA through the FAFSA4Caster.

https://www.fafsa4caster.ed.gov/

For the most part, most of us are only going to be offered unsubsidized Stafford loans, and since they're NOT need-based it doesn't quite matter if you "shield" a few thousand bucks in an IRA or in your Mom's checking account or wherever. I personally find all this strategizing to be an ethical grey area.

ryguy904's suggestion on the Roth IRAs is a good one though. You can technically withdraw principal without penalty and additional taxes at any time, and withdraw earnings for educational expenses without penalty, too.
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Re: FAFSA Strategies [#permalink] New post   29 Jan 2009, 20:37
ryguy904 wrote:
mbamatric wrote:
As far as IRA goes, they specifically say that retirement accounts are not included, so it would serve as a bit of a safe-haven for your cash...


Not sure how many big savers are around here, but the Roth IRA is a great place to stash some assets before fillingn out the FAFSA. If you haven't already done so, you can contribute $5,000 for 2008 (before April 15) and another $5,000 for 2009. The best part is you can take out your contibutions whenever you want without penalty (dividends and cap gains can't be touched until you are 59 1/2, though).


I thought Roth IRAs can't be utilized if you make over a certain amount of money, something around $90K/year, unless I'm mistaken.
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Re: FAFSA Strategies [#permalink] New post   30 Jan 2009, 07:06
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rca215 wrote:
I thought Roth IRAs can't be utilized if you make over a certain amount of money, something around $90K/year, unless I'm mistaken.


You are correct. Generally, the income limits are:

- $114,000 for single
- $166,000 for married

Source: https://www.irs.gov/publications/p590/ch02.html#d0e9252
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Re: FAFSA Strategies [#permalink] New post   30 Jan 2009, 07:23
Good question. I was thinking about this, as I have some cash I need to decide what to do with. I wanted to keep this sum as somewhat of a reserve during school, something we could tap into for various living expenses rather than being tempted by credit cards. Sounds like perhaps dumping it into an IRA might be better than putting it into some other liquid account?

However, as somebody else noted, I'm not sure how much difference it will make. Wouldn't the total amount available for the student to contribute affect the subsidized loan amount offered? You can still borrow up to the limit on unsubsidized and then get the rest through the Plus loans at 8.5%, regardless of how much you have available in savings, right?
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Re: FAFSA Strategies [#permalink] New post   30 Jan 2009, 07:34
MeddlingKid wrote:
Wouldn't the total amount available for the student to contribute affect the subsidized loan amount offered? You can still borrow up to the limit on unsubsidized and then get the rest through the Plus loans at 8.5%, regardless of how much you have available in savings, right?


The amount of assets you have would figure into the calculation of your "expected family contribution," which the school uses in figuring out your financial aid award. It certainly would affect whether you qualify for subsidized Stafford loans or need-based scholarships (if your school offers them), but I don't think it would affect unsubsidized or Plus loans.
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Re: FAFSA Strategies [#permalink]
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