Is Your College Planning Strategy Appropriate?

As a seasoned financial advisor, I will be the first to admit that the general public has a significant amount of mistrust with the financial services industry. I attribute it to the lack of transparency by the bigwigs in the industry and the fact that certain advisors are only held to a suitability standard of care, rather than a fiduciary standard. So, part of my goal each week with this column is to lend a bit of clarity to the seemingly muddied waters of the financial world.
 
As I have mentioned before, four of us work in our small office: Pam, Susan, Jill (my wife) and me. We all have kids, and all have at least one teenager. So, like many of you with teenagers, we have at least one financial concern in common: how the heck to pay for college.
 
Folks, unfortunately, I have found that this fear is capitalized on by some in the financial services community. How? By offering “advice” that may be disingenuous.
 
You see, some people who call themselves “college advisors” are really insurance agents, primarily. Their goal is to sell a product, all the while claiming that such a purchase will allow the prospective purchaser’s child to receive more college aid. And in some cases, that advice might be accurate. In many cases, however, such advice is aimed less at college aid, and more at the insurance agent’s commission.
 
A student’s eligibility for needs-based aid is predicated on a number of factors, including portions of the parents’ “countable” assets, the parents’ income, the student’s “countable” assets and the student’s income. These figures are used, in part, to calculate the family’s expected family contribution (EFC). The amount of aid that is awarded is equal to the cost of the chosen school minus the EFC. So, the higher a family’s “countable” assets, the higher their EFC, and the lower their aid. Therefore, in some cases, it can be wise to shift money that would otherwise be considered a “countable” asset into an annuity or life insurance contract, which, in some circumstances, becomes a “non-countable” asset. As such, the money in those contracts is not reported on the Free Application for Federal Student Aid (FAFSA). This is a good thing.
 
However, many schools require a supplemental report, the CSS (College Scholarship Service) Profile, in addition to the FAFSA application. Those annuities mentioned above will show up on the CSS Profile.
 
This means that when schools using the CSS Profile determine the needs-based financial aid offered to a child, that figure will be partially decreased by any non-qualified annuity assets listed on the CSS Profile. This won’t necessarily affect a student’s federal aid eligibility, but it will often affect the amount of institutional aid offered.
 
(Full disclosure here: I am a big fan of both term and cash value life insurance, as well as fixed index annuities. I even own some myself. However, just with any financial instrument, they must be used appropriately.)
 
So, I reached out to Raquel Nejako. Raquel is the owner of New England College Planners in Mashpee. She is a college-planning expert, and her firm focuses on not only how to get your kid into the best college, but how to effectively pay for it.
 
Raquel says, “College costs today truly do represent an investment for most families, from the fees for standardized tests like the SATs, to applications ranging upward of $80 each, to the average cost of schools now between $28-55K per year. And that investment warrants devoting much more time and research to the school selection process than many put into the process. It goes without saying that your student’s school wish list should be part of the family discussion about college, but understanding what it is that schools are looking for and what they are willing to give your family before your student falls irretrievably in love with them is key to forging a well-rounded list that will pay off financially and academically in the long run. Many think that they will not get any money from schools based on their income or assets, but those same families are often unaware that most schools give both need-based and merit-based aid. They do not actively leverage their student’s academic strengths by creating a balanced school list, which could result in great financial options for them. This is where a professional in the field can really help.”
 
Great advice, Raquel!
 
Another thing to consider when looking into a strategy using life insurance or an annuity to “hide” assets is whether the amount of money that can be stashed away will even make a difference. As I mentioned above, the eligibility for aid is calculated by taking the cost of a school and subtracting the expected family contribution. Let’s assume that a student holds $15,000 in assets. The EFC comprises (among other things) 20 percent of the student’s savings. But if your child is going to a school that costs $20,000, and your expected family contribution would be $25,000, including that $15,000, stashing away your kid’s $15,000 savings account in a life insurance contract will only subtract $3,000 from the EFC, which is still above the cost of that college. If your child wants to attend a school that costs $30,000 a year and all of those numbers are otherwise the same, then making that move could give the child that extra $3,000 of eligibility.
 
So, you may be asking yourself, why not try such a strategy if it could only help? Even if it is not a sure thing. Well, folks, many of these products are very complex and can have costs associated with them, including surrender fees, should you need access to the money used to fund them. Another consideration is that even if the funds can be accessed, oftentimes taking a distribution from one will then “count” as income for purposes of that financial aid application. And income, depending on whether it is the parents’ income or the student’s, can be factored into the expected family contribution at a higher percentage than a “countable” asset.
 
Raquel adds, “Schools have become very savvy with regard to the sheltering products and, depending on the financial aid forms they require, the investments they look at will vary, as will a family’s EFC. Again, knowledge is power. Understanding what assets and investment vehicles a school looks at before your student applies can help you gain the valuable leverage you need to ensure that you receive a good aid package! After all, every cent counts in this process!”
 
Well said, Raquel.
 
As with any financial strategy, it is important that you examine your specific goals and consider all the circumstances in order to make sure that any offered solution is appropriate for you.
 
It is up to you to wade through the muddied waters and find clarity in your financial situation.
 
Be vigilant and stay alert, because you folks deserve the best.