Seventy-five percent of the families that come to me for college planning have $800,000 or more in investible assets, mostly in retirement accounts.
Fortunately, assets in retirement accounts don't count against students' college aid eligibility, but other assets do. That's why clients, financial advisers and the media often ask me about the best way to position assets to maximize college aid.
It is a good question, to which, after 20 years of specializing in college planning, I know the definitive answer: It depends.
The best advice on positioning clients' assets for financial aid is based on several factors. First, let's clarify the type of aid to which the asset question pertains.
There are two kinds: academic-merit and need-based aid. The former is straightforward. If you have the grade, you get the aid. That's good news for smart kids, especially those who don't qualify for need-based aid. Eligibility for that is based on this formula: Cost of attendance minus expected family contribution equals need.
EFC is the minimum amount the household is expected to contribute toward the cost of college and is calculated using three processes: federal methodology, institutional methodology and consensus methodology.
All three methods are based on the income and assets of the parents and student as reported on the two financial aid forms, the FAFSA (FM) and the CSS Profile (IM and CM).
Though retirement assets don't figure in the EFC calculation, assets elsewhere do, such as balances in checking, savings and certificates of deposit, as well as investment real estate, exchange-traded funds and commodities.
Parents' total reportable assets will vary according to the methodology used, and from that reportable asset value the savings allowance of about $40,000 to $50,000 is subtracted to arrive at an available value. Parents are expected to use up to 5.64% (federal) and 5% (institutional and consensus) of those available assets annually on college.
KNOW THE METHODS
Small businesses, home equity and nonqualified annuities aren't counted in the FM, but they are in the IM and CM. Under the CM, though, home equity is capped at 1.2 times the parents' adjusted gross income.
Students must report the same types of assets as parents but don't have a savings allowance, so 100% of the value of student-owned assets gets counted. Student-owned assets are counted at a rate of 20% (FM), 25% (IM) and 5% (CM), but under the FM, Section 529 college savings accounts and Coverdell education savings accounts are counted as parent assets (5.64%), even though the student owns them.
None of the methodologies include life insurance cash values or personal assets such as cars.
This is how I arrive at my guidance to clients on asset positioning and college aid: If the expected family contribution based on parents' income alone is more than the cost of the school, the student will not qualify for need-based aid. Therefore, unless the parents can lower their income, neither their assets nor the student's affect aid eligibility.
If the income-only EFC is less than the cost of the college, however, the student may qualify for need-based aid. Any student-owned assets will affect aid eligibility, and if the parents' reportable assets exceed their savings allowance, their “excess” assets will affect eligibility.
I then look at the family's reasonable options for decreasing reportable assets and increasing aid eligibility — knowing that they have to pay their share of the cost out of their income, assets and loans (if necessary).
If a family doesn't qualify for aid, advisers should focus on tax savings, merit aid and how they will pay the bill. Your guidance should not center on financial aid alone.
The consultative approach to college planning combines school selection, financial aid, “tax aid” and the best use of the family's personal resources to form a strategy that lets the family pay for college while expanding retirement assets. It's all interconnected, and your advice should be, too.
The most expensive colleges now carry price tags of more than $60,000 a year, so parents with assets need direction more than ever. Hopefully, my advice better positions you to provide it.
Troy Onink (troy.onink@stratagee .com) is the chief executive of Stratagee.com, which provides college planning approaches to families and their financial advisers, and licenses college planning software to advisers.